CHAPTER 4

Pricing Decisions and Profit Analysis

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Introduction
Chapter Objective
Pricing
Pricing Decisions
Strategies
Profit analysis

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Price Setters Versus Takers
When a provider has market dominance and hence
can set its own prices (within reason), it is said to be a
price setter.
In other situations, where providers are price takers:
Perfectly competitive markets
Payer dominance
Government programs
However, in many situations, providers are neither
pure price takers nor price setters, and room for
negotiation exists.
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Price Setting Strategies
Price setter can use two methods for setting prices :
Full cost pricing
 Under full cost pricing, price covers all costs:
 Direct costs (fixed and variable)

 Indirect (overhead) costs

 Economic costs (profit)

Marginal cost pricing

 In marginal cost pricing, price cover incremental, or
marginal costs (the cost added by producing one additional unit of a product or
service.).

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 Target Costing
Target costing is a management strategy used by
price takers.
Under target costing:
 Revenues are projected assuming prices as given in the
marketplace.
 Required profits are subtracted from revenues.

 The remainder is the target cost level.

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 Profit (CVP) Analysis
Profit analysis, also called cost-volume-profit (CVP)
analysis, is a technique used to assess the effects of
alternative volume assumptions on costs and
profits.

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 Profit Analysis Example
ABC hospital has found that in one year total 50 expected visits happened in the hospital. So
as per these visit of patients, they predicted the following cost:
Total Fixed Cost: 5000
Total Variable Cost: 2000

Q.1. Now calculate what is the variable cost rate ?

Variable Cost Rate is= Total Variable Cost/ Total Visit
=2000/50=40 SR
(it means per visit of patient, variable cost is 40SR)
Q. 2 What is the Total Cost?
Total Cost= Total Fixed cost+ Total Variable cost
= 5000+2000= 7000
Q.3. Total fixed cost is 5000 and variable cost rate is 40 SR per visit. If total patient
visits are 50, What will be the total cost ?
Total Cost= Total Fixed cost+ Total Variable cost
Total Fixed cost= 5000
Total Variable cost= (Variable cost rate X total visit)= 40 X 50= 2000 SR
Total Cost= 5000+2000= 7000 SR

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Profit Analysis Example (Cont.)
Q.4 Now, suppose in ABC hospital the average revenue per visit is expected
to be 200 SR. Total patient visit are 50. Fixed cost is 5000 SR. variable cost
rate is 40 SR. How much will be the profit/Loss?
Ans.
Profit = Revenue – Total Cost
Loss= Total Cost- Revenue
Total Revenue= per visit revenue X Total Visit
= 200 X 50 = 10000 SR
Total Cost= Fixed Cost (FC) + Variable Cost (VC)
Fixed Cost= 5000
Variable Cost= Variable cost Rate per visit X total visit
= 40 X 50 =2000 SR
Total Cost= 5000 + 2000= 7000
Profit= Revenue-Total Cost= 10000-7000= 3000
Suppose if revenue per visit is 100 SR. Calculate how much will be profit or
loss?

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 Breakeven Analysis
Breakeven Volume, refers to the point in which total
cost and total revenue are equal. Breakeven volume is
needed for an organization to provide services.
There are two types of breakeven:
Accounting breakeven (zero profit)
Economic breakeven (with profit)

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Q. In ABC hospital, Fixed cost is 5000. Variable cost rate is 50 SR per visit.
Per visit revenue is 100 SR. What is the accounting breakeven (profit 0)
volume / visit for ABC hospital?
Ans.:
In accounting breakeven profit will be Zero (0).

Profit = Revenue - Variable Cost (VC)- Fixed Cost (FC)

Revenue= Visit X Revenue per visit
= V x 100
Variable Cost=Visit X Variable cost rate
= V x 50
Fixed Cost= 5000
(V x 100)-(V x 50)-5000=0
100v-50v=5000
50v=5000
V=5000/50
V=100

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Q. In ABC hospital, Fixed cost is 5000. Variable cost rate is 50 SR per visit.
Per visit revenue is 100 SR. What is the economic breakeven volume / visit
for ABC hospital, if desired profit is 10000 SR?
Ans.:

Profit = Revenue - Variable Cost (VC)- Fixed Cost (FC)

Revenue= Visit X Revenue per visit
= V x 100
Variable Cost=Visit X Variable cost rate
= V x 50
Fixed Cost= 5000
(V x 100)-(V x 50)-5000= 10000
100v-50v=10000+5000
50v=15000
V=15000/50
V=300

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Thank You

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