Integrated Health Associates (IHA) has the following cost structure:
Variable cost per visit $20 Fixed costs $120,000 per year Number of visits per year 4,000
For parts (a) and (b), assume IHA is a price setter.
a. What is the minimum price per visit IHA should set using marginal cost pricing?
b. Assume IHA sets a price of $50 per visit. Does this reflect a marginal cost pricing strategy or a full cost pricing strategy?
How do you know?
c. Now assume the market price per visit is $45 and IHA is a price taker. What target average cost per visit must IHA achieve to earn a profit of $50,000? Is the target cost higher or lower than their current average cost per visit?