Candice Sterling is a veterinarian. She has always been concerned for the pets of low-income families. These families love their pets but frequently do not have the means to provide them proper veterinary care. Dr. Sterling decides to open a part-time veterinary practice in a low-income neighborhood. She plans to volunteer her services free of charge two days per week. Clients will be charged only for the actual costs of materials and overhead. Dr. Sterling leases a small space for $300 per month. Utilities and other miscellaneous costs are expected to be approximately $180 per month. She estimates the variable cost of materials to be approximately $10 per pet served. A friend of Dr. Sterling who runs a similar type of clinic in another area of town indicates that she should expect to treat the following number of pets during her first year of operation.
Dr. Sterling’s friend has noticed that visits increase significantly in the summer because children who are out of school tend to bring their pets to the vet more often. Business tapers off during the winter and reaches a low point in December when people spend what little money they have on Christmas presents for their children. After looking at the data, Dr. Sterling becomes concerned that the people in the neighborhood will not be able to afford pet care during some months of operation even if it is offered at cost. For example, the cost of providing services in December would be approximately $42 per pet treated ($480 overhead ÷ 15 pets = $32 per pet, plus $10 materials cost). She is willing to provide her services free of charge, but she realizes that she cannot afford to subsidize the practice further by personally paying for the costs of materials and overhead in the months of low activity.
She decides to discuss the matter with her accountant to find a way to cut costs even more. Her accountant tells her that her problem is cost measurement rather than cost cutting.
Required
Assume that you are Dr. Sterling’s accountant. Write a memo describing a pricing strategy that resolves the apparent problem of high costs during months of low volume. Recommend in your memo the price to charge per pet treated during the month of December.
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