Pricing Decisions and Profit AnalysisChapter 56112ANSWERS

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Pricing Decisions and Profit Analysis

Chapter 5


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
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5.6 a. Profit analysis, or more formally, cost-volume-profit (CVP) analysis, is a type of analysis used primarily to assess the effects of volume changes on costs, revenues, and profit.
Additionally, it is used to assess the effects of alternative assumptions regarding costs, volume, and prices.
b. CVP analysis is very useful to managers as they evaluate the potential impact of alternative future courses of action. It can be used to examine an almost unlimited number of price, volume, and cost scenarios to see how different courses of action affect profits. c. A profit and loss (P&L) statement is a listing of revenues, costs, and profits for a department or service (or some other entity). The idea here is to get a feel for the profitability of the entity and how that profitability was achieved. The specific format of a
P&L statement is quite flexible, so it can be constructed to best meet the information needs of a particular managerial decision.

5.7 a. Contribution margin is defined as the difference between per unit revenue and the variable cost rate (per unit variable cost).
b. The contribution margin is the dollar amount per unit of output (per visit in the text example) that is available to cover fixed costs and ultimately create a profit because variable costs have been accounted for in the calculation of the contribution margin. The total contribution margin, which is volume multiplied by the contribution margin, first must be applied

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