Your health care business is beginning to take shape. You’ve chosen products or
ID: 362986 • Letter: Y
Question
Your health care business is beginning to take shape. You’ve chosen products or services to offer, come up with a business model, and looked at your fixed and variable costs. Now you have to decide how to set your prices. For this assignment, determine your prices and when you will make a profit. Be sure to answer the following questions for the health business that photos are below. 1. In your own words, discuss both the full-cost pricing strategy and the marginal-cost pricing strategy and explain how each would apply to your health care business. How would target costing affect your business?Identify the variable and fixed costs associated with your selected health care business. Discuss how these costs are affected by changes in productivity levels. Determine what steps you could take to reduce at least two of those costs. (15 points) 1. Fixed Costs Rent Dental Supplies Utilities Average Dentist Salary Dental Assistants Annual $32,500 $24,000 $9,500 $140,000 $65,000 $32,750 Monthly $2,708 $2,000 $792 $11,667 $5,417 $2,729 Daily (for 30 days a month) $90 $67 $26 $389 $181 $91 Dental Hygienists Total $303,750 $25,313 $844 Variable Cost: Other (charts office supplies) $2,500 $208 $7 Daily Sales for Break Even = Daily Fixed Cost + Daily Variable Cost $844+$7 -$851 At Propose fee of $160 per patient, Number of minimum patients to be attended daily for break- even=$851/$160 =5.32= 6 patients Any additional patient seen after 6th patient adds to profits. For reducing fixed costs: (a) Rents and Salaries can be renegotiated as per the size and level of operations. Further, variable pays may be introduce based on the number of patients attended Rationing of supplies and use of utilities may be done for reducing fixed costs. (b) For reducing variable costs: (a) Number of patients may be increased by effective sales promotion and advertising, that will help reduce variable cost per patient and adds to profits.
Explanation / Answer
As per the given details, fixed cost per day is $844 and variable cost per person is $7, minimum price under marginal cost pricing strategy would be $7 to recover only the variable cost on that particular customer. However marginal cost pricing strategy is not good for a new company, which does not have funds to sustain for a long time while bearing the expenses of fixed cost and earning only the variable cost from the customer.
And by going with the same logic we can charge per customer somewhere around $100. So in order to achieve the break-even, we need 9 customer daily which will earn $900 daily and fetch $49 profit every day after deducting every type of cost.
In case of demand is directly and highly price elastic we can reduce the price further a bit say, $90, and if it will fetch us 2 more customers every day than it would be $990 (90*(11+2)=990). This would be the best scenario for setting up the price.
Apart from all the quantitive data, qualitative information is very important such as level of competition, locality, customer profile, demographic profile the reputation as a dentist, reputation as a businessman will also matter a lot.
And if we talk about further renegotiations of salaries and rents it will totally depend upon how your business perform in its initial days, say 6 months at least after that you can forecast the trend and make up your mind regarding renegotiations of all the contracts.
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