Since a company cannot have all its products or

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Unformatted text preview: tracts are written this way, especially in the defense industry, where the argument is made that the activities needed to design and manufacture the product are so uncertain that it would be impossible to determine the cost in advance, and hence set a reasonable price. Similarly, some healthcare insurance companies pay hospitals and other providers (such as community health centers, nursing homes, rehabilitation hospitals, and home health agencies) on the basis of cost. Because many health policy analysis believe these cost-based payments have contributed to the rising cost of health care, however, many insurers have shifted or are shifting to fixed price arrangements, where the price usually is based on a patient’s diagnosis. In these situations, a healthcare provider becomes a price-taker, meaning that an accurate assessment of full costs is an important ingredient in management’s decision making. Profitability Assessments Even firms that are price takers must calculate full costs if management is to know whether a particular product or service...
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