Allied Laboratories is combining some of its most common tests into one-price packages. One such...

Question:

Allied Laboratories is combining some of its most common tests into one-price packages. One such package will contain three tests that have the following variable costs:

Test A Test B Test C
Syringe $4.00 $4.00 $4.00
Blood Vial 0.50 0.50 0.50
Forms 0.20 0.20 0.20
Reagents 0.80 0.60 1.20
Bandage 0.15 0.15 0.15
Breakage/loss 0.10 0.10 0.10

When the tests are combined, only one syringe, form, and sterile bandage will be used. Furthermore, only one charge for breakage/losses will apply. Two blood vials are required, and reagent costs will remain the same (reagents from all three tests are required).

a. As a starting point, what is the price of the combined test assuming marginal cost pricing?

b. Assume that Allied wants a contribution margin of $12 per test. What price must be set to achieve this goal?

c. Allied estimates that 3,000 of the combined tests will be conducted during the first year. The annual allocation of direct fixed and overhead costs total $45,000. What price must be set to cover full costs? What price must be set to produce a profit of $40,000 on the combined test?

Variable costing:

Variable costing refers to the process of differentiation among the fixed and variable costs and the effect on profit due to changes in the production activity. Variable cost changes as per the production activity whereas the fixed cost remains unchanged.

Answer and Explanation:

a. Calculation of price of combined test:

Particulars Amount Amount
Variable cost:
Blood vial $1.00
Reagents $2.60
Total variable cost $3.60
Fixed cost:
Syringe $4.00
Forms $0.20
Bandage $0.15
Breakage/loss $0.10
Total fixed cost $4.45
Price of combined test $8.05

b. Calculation of price of the test:

{eq}\begin{align*}{\rm\text{Price}}\;{\rm\text{of}}\;{\rm\text{test}} &= {\rm\text{Contribution}}\;{\rm\text{margin}} + {\rm\text{Variable}}\;{\rm\text{cost}}\\ &= \$ 12.0 + \$ 3.60\\ &= \$ 15.60\end{align*} {/eq}

c. Calculation of required price

{eq}\begin{align*}{\rm\text{Required}}\;{\rm\text{price}} &= \frac{{{\rm\text{Total}}\;{\rm\text{cost}}}}{{{\rm\text{Number}}\;{\rm\text{of}}\;{\rm\text{units}}}}\\ &= \frac{{\left( {\$ 8.05 \times 3,000\;{\rm\text{units}}} \right) + \$ 45,000}}{{3,000\;{\rm\text{units}}}}\\ &= \$ 23.05\;\end{align*} {/eq}

Calculation of the required profit for profit $40,000:

{eq}\begin{align*}{\rm\text{Required}}\;{\rm\text{price}} &= \frac{{{\rm\text{Total}}\;{\rm\text{cost}} + {\rm\text{Required}}\;{\rm\text{profit}}}}{{{\rm\text{Number}}\;{\rm\text{of}}\;{\rm\text{units}}}}\\ &= \frac{{\left( {\left( {\$ 8.05 \times 3,000\;{\rm\text{units}}} \right) + \$ 45,000} \right) + \$ 40,000}}{{3,000\;{\rm\text{units}}}}\\ &= \$ 36.38\end{align*} {/eq}


Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

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