Pricing Decisions and Profit AnalysisChapter 56112ANSWERS
Pricing Decisions and Profit Analysis
Chapter 5
6/1/12
ANSWERS TO END-OF-CHAPTER QUESTIONS
5.1 a. A hospital that is a price setter has some degree of market dominance and hence can, more or less, dictate the prices that it sets on its services. Conversely, if the hospital is one of a large number in its service area and is not in a position to distinguish its services from other hospitals, it is a price taker. This means that it will have to “take” the prices set in the marketplace without having the ability to influence those prices.
b. In most situations, providers are neither pure price setters nor pure price takers. Rather, for some services or in some markets they will be able to act as price setters; for other services or in other markets they will be price takers.
5.2
Full-cost pricing recognizes that to remain viable in the long run, healthcare organizations must set prices that recover all costs associated with operating the business. Thus, prices are set to cover (1) the direct variable costs of providing the service, (2) the direct fixed costs, and (3) an appropriate share of the overhead expenses of the organization.
In addition, one could make a strong argument that full-cost pricing should recognize that a profit component is necessary to support growth and, for investor-owned businesses, to provide a return to the suppliers of equity capital. Under marginal-cost pricing, prices are set to cover only the marginal (typically the variable) costs associated with the service.
5.3
Under full-cost pricing, prices are set so that all costs, including the required profit component, are recovered. In this situation, the business will be able to support growth and sustain its economic viability over time. When prices are set on the basis of marginal costs, the organization will not recover its total costs, including both direct and overhead fixed costs. With no revenues to cover these costs, the business would ultimately fail. In theory, no services
Chapter 5
6/1/12
ANSWERS TO END-OF-CHAPTER QUESTIONS
5.1 a. A hospital that is a price setter has some degree of market dominance and hence can, more or less, dictate the prices that it sets on its services. Conversely, if the hospital is one of a large number in its service area and is not in a position to distinguish its services from other hospitals, it is a price taker. This means that it will have to “take” the prices set in the marketplace without having the ability to influence those prices.
b. In most situations, providers are neither pure price setters nor pure price takers. Rather, for some services or in some markets they will be able to act as price setters; for other services or in other markets they will be price takers.
5.2
Full-cost pricing recognizes that to remain viable in the long run, healthcare organizations must set prices that recover all costs associated with operating the business. Thus, prices are set to cover (1) the direct variable costs of providing the service, (2) the direct fixed costs, and (3) an appropriate share of the overhead expenses of the organization.
In addition, one could make a strong argument that full-cost pricing should recognize that a profit component is necessary to support growth and, for investor-owned businesses, to provide a return to the suppliers of equity capital. Under marginal-cost pricing, prices are set to cover only the marginal (typically the variable) costs associated with the service.
5.3
Under full-cost pricing, prices are set so that all costs, including the required profit component, are recovered. In this situation, the business will be able to support growth and sustain its economic viability over time. When prices are set on the basis of marginal costs, the organization will not recover its total costs, including both direct and overhead fixed costs. With no revenues to cover these costs, the business would ultimately fail. In theory, no services