Janet Gilbert is director of a lab. She has some extra capacity and has contracted with some small neighboring hospitals to run some of their lab tests.
She has recently had a study conducted and has determined that her costs for these contracts are $50,000, of which $7,000 is the variable cost of supplies. The rest is non-avoidable fixed cost. She currently charges an average of $30 per test.
She is thinking of lowering her price by 20 percent in hopes of raising her current volume of 20,000 tests by 25 percent. If she does so, she expects her variable cost per test will go up by 5 percent.
Determine the current and predicted (a) revenues, (b) variable costs, and (c) total contribution margin and product margin.
What should she be recommended to do? Why?