In order to maximize a firm’s profit, it’s important that healthcare administrators and operations professionals understand just how important it is to ensure that marginal revenues exceed marginal costs. When times are good, managers sometimes take their eye of costs and experience a phenomenon known as “expense creep”, which will undoubtedly have an adverse impact on the sort- and long-term profitability of the entity. We, leaders, need to be comfortable using a model to choose the profit maximization level of output. There are a number of strategies that being used with the public, private, for-profit, and non-profit sectors to improve their profit position. Regardless of the business structure, ALL businesses must ultimately generate profit in order to remain financially solvent. There are instances in which business don’t generate a profit, but remain viable enterprises. For example, start-ups typically don’t generate a profit for the first couple of years; however, the business owners can deduct these losses from their current and or past tax returns. For underperforming businesses that are acquired, the losses will be used to lessen the tax obligations of the acquiring firm. It is really important for healthcare organizations to be able to establish their prices using a sound and supportable methodology. In this unit, we’ll cover the standard marginal cost pricing model; explore how price discrimination can increase profits, examine the linkages between pricing and profits; and really delve into the importance of pricing setting.
It is important that you understand the interplay between pricing and profit maximization in business. There are very pragmatic approaches used to establish appropriate price points for goods and services and achieve optimal profit margins. To gain a deeper appreciation for pricing and profit maximization, you will be expected to complete the following end-of-chapter problems and mini-case:
Chapter 11: 11.8, and 11.10 (pp. 182-184; Lee textbook)
Chapter 12: Case 12.1, Price Discrimination in Practice (pp. 192-193, Lee textbook), 12.9, 12.10, and 12.14 (pp. 197-199; Lee textbook)
Unit Learning Outcomes
ULO 1. Evaluate why price discrimination can increase profits. (CLO 7)
ULO 2. Justify the importance of setting correct prices. (CLO 1, 2, and 3)
ULO 3. Evaluate measures of profitability. (CLO 3 and 7)
ULO 4. Compare marginal revenue and marginal costs for decision making. (CLO 7)
ULO 5. Use a model to select a profit maximizing level for output. (CLO 5, 6 and 7)
Directions
The students are expected to carefully read the assignment instructions, then thoroughly and explicitly address each question. Microsoft Excel will be used to perform the mathematical computations and graphs; however, the problems and their corresponding responses should be written up in a Microsoft Word document. Your responses to the assigned mini-case study should also be included in the same document. IMPORTANT: Make certain that there is a detailed description of how the calculations were performed. You will also need to include an interpretation of the results. While there is no minimum number of references that need to be utilized to support the completion of this assignment, it is generally understood that outside sources, including the text, will be necessary to complete the problems. The document must adhere to the APA writing style in terms of using in-text citations and the listing of sources on the references page. The Microsoft Word document and Excel spreadsheet are to be uploaded under the correct unit assignment page.
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