Let us suppose that a hospital wants to set their fees for an overnight stay such that the contribution margin on a hospital room will be 18%

Economics Sep 01, 2020

Let us suppose that a hospital wants to set their fees for an overnight stay such that the contribution margin on a hospital room will be 18%. The cost to the hospital of an overnight stay (staff, physical equipment, and supplies) is $620. What fee should they charge to obtain a contribution margin of 18%? [Hint: if the contribution margin is 18%, then the $620 cost is 82% of Operating Revenue or room fee.]

What is the target fee for an overnight stay? In other words, what must the Operating Revenues from that one room be?

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Expert Solution

Computation of Target Fee for an Overnight Stay:

Target Fee for an Overnight Stay = Variable cost/(1-Contribution Margin)

= $620/(1-18%)

Target fee on stay = $756.10

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