Answered: What is the product margin? Should…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter7: Allocating Costs Of Support Departments And Joint Products

Section: Chapter Questions

Problem 33P: Biotechtron, Inc., has two research laboratories in the Southwest, one in Yuma, Arizona, and the...

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Janet Gilbert is director of labs. She has some extra capacity and has contracted with some small neighboring hospitals to run some of their lab tests. She has recently had a study conducted and has determined that her costs for these contracts are $50,000, of which $7,000 is the variable cost of supplies. The rest is non-avoidable fixed cost. She currently charges an average of $30 per test. She is thinking of lowering her price by 20% in hopes of raising her current volume of 20,000 tests by 25%. If she does so, she expects her variable cost per test will go up by 5%. Determine the following:

What are the current revenues and the predicted revenues if these changes are made?
What are the current variable costs and the predicted variable costs if these changes are made?
What is the total contribution margin and the predicted contribution margin if these changes are made?
What is the product margin?
Should Janet make these proposed changes to her fees? You will answer YES or NO.

(answers 4 and 5 needed)

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