Question

Your hospital has been approached by a major employer in your market area to negotiate a preferred provider arrangement. The employer is seeking a 25% discount from your current charges. Describe a structure that you might use to summarize the financial implications of this decision. Describe the factors that are critical in this decision.

Answer 1

25% discount on the regular charges is huge and can affect the net income of the hospital. Further, it can affect the current customer base if the existing customers came to know about this discount. Following will be the structure of financial implication of this decision:

Special order à Increase in revenue à Increase in variable costs à Increase in net income à Go ahead with the order

If the special order generates a net loss, it should be rejected straightaway. Following factors are critical in this decision:

-        Incremental revenue and costs

-        Availability of the cost and price information of the special order to the public

-        Company’s policies regarding discount and special order