On the day of discharge from the GUMC hospital, most patients fill their prescriptions from the GUMC pharmacy. However, when it comes time to renew them, they turn to a local pharmacy because that is more convenient than driving back to the GUMC pharmacy. To encourage prescription renewals, GUMC is considering offering either free overnight delivery or reduced prices on renewal orders.
Currently, the GUMC pharmacy has revenue of $54,990,000 per year on 846,000 orders. The gross margin (price minus cost of drugs) is approximately 25 percent. Free overnight delivery is expected to cost $8 per order and result in 120,000 renewal orders per year. To deal with the increased volume, the pharmacy will need to hire two pharmacists at $90,000 each per year and an additional staff person (to handle shipping) at $50,000 per year. Alternatively, the pharmacy can generate 120,000 renewal orders per year by offering 20 percent off the prices of renewal orders. With this option, two pharmacists must be hired, but no additional staff person will be needed.
Required:
Estimate the impact on annual pharmacy profit of free overnight delivery and 20 percent off on renewals. Which option should be selected?