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
Disposable syringe $3.00 $3.00 $3.00
Blood vial 0.50 0.50 0.50
Forms 0.15 0.15 0.15
Reagents 0.80 0.60 1.20
Sterile bandage 0.10 0.10 0.10
Breakage/losses 0.05 0.05 0.05
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 are required for all three tests).
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 $10 per test. What price must be set to achieve this goal?
c. Allied estimates that 2,000 of the combined tests will be conducted during the first year. The annual allocation of direct fixed and overhead costs total $40,000.
What price must be set to cover full costs? What price must be set to produce a profit of $20,000 on the combined test?
a. Marginal cost is the total variable cost. The total variable cost is
1 syringe $3.00
2 vials 1.00 (0.50 X 2)
1 form 0.15
3 reagents 2.60 (0.80+0.60+1.20)
1 bandage 0.10
The solution explains calculations relating to contribution margin, incremental costs, breakeven