Homework SourseAn equipment acquisition proposal was being considered by a
An equipment acquisition proposal was being considered by a large health care organization. The array machine will enable the hospital to perform autoimmunity tests (for immunoglobulins G, M, and A and complements C3 and C4) in-house rather than sending them to a reference laboratory. Test turnaround time is expected to decrease by 2 days. The array machine costs $50,000, with a useful life of 5 years. The depreciation schedule will be $10,000/year. The expected volume for tests is one of each of the five autoimmunity tests per day. Having the tests done by the reference laboratory costs the hospital an average of $10/test. The hospital\'s average charge to patients is $20/test. If the array machine is acquired and the tests done in-house, the costs of reagents would average $2/test. The array machine can run a maximum of 40 patient samples and perform 20 different tests on each sample every 2 hours. Except in extraordinary circumstances, tests would be run Monday thorough Saturday. The machine requires approximately 1 hour of technician time (valued at $15/hour# each day to calibrate it, to conduct a test run for control purposes and to perform general maintenance. This is a fixed cost because it does not vary by volume. Technician setup time to run tests is negligible. Beyond the five autoimmunity tests the laboratory wants to perform in-house, the machine can also perform apolipoprotein cardiac profiles that are currently done on equipment in the clinical chemistry department. The array machine can provide a quantitative measure and not just the positive or negative indicator that the clinical chemistry department\'s current equipment gives. 3. If half of the patients have Medicare coverage #DRG reimbursement includes all tests), would the laboratory break even on the equipment? If not, should the equipment be acquired anyway? The response should provide a rationale and discussion regarding each step you take
Solution
Deduct One hour time based on technician Time for Calculation.
So, based on the scenario above it would be better for the Hospital to:
1.) It is recommended to go for the machine if number of test go beyond this limit.
2.) Since, our Existing arrangement provide 50% of contribution Hence only 40% of revenue each in terms of incremental revenue is coming from machine purchase inhouse from this point of view it is recommended to go for this machine if it goes beyond it\'s BEP level.
3.) Even if Hospital does not go to salable BEP then, it is still recommended to go for the machine in the long run as waiting period of two days to get the test report is removed.
4.) Clinical test conducted at present which only provide positive/negative feedback based on patient report, But if machine is bought it will give the patient\'s whole details in order to deduce the decision.
5.) If Over a period of time customer\'s increase then, they can only be treated if the machine is inhouse.
6.) In coming period number of patients may further increase so it will reach BEP level will be reached.
So, Based on the above analysis company may decide.
| Particulars | Revenue if array machine is not acquired | Revenue if array machine is acquired | Incremental for rough not for consideration and not to be used in the question | ||
| The hospital\'s average charge to patients | $ 20.00 | $ 20.00 | $ - | ||
| hospital an average | $ 10.00 | $ (10.00) | |||
| machine is acquired and the tests done in-house, the costs of reagents would average (Variable cost) | $ 2.00 | $ 2.00 | |||
| Contribution = Sales - Variable cost | 10 | $ 18.00 | $ 8.00 | ||
| Technician Cost | 0 | $ 4,680.00 | $ 4,680.00 | ||
| Machine Depriciation to be charged in a year | 0 | $ 10,000.00 | $ 10,000.00 | ||
| P/V Ratio | 50% | 90% | |||
| BEP Sales= Fixed cost / P/V ratio | $ - | $ 16,311.11 | $ 16,311.11 | ||
| BEP (Number of Test required) = BEP Sales/ Contribution | - | 906.17 | $ 906.17 | ||
| Capacity ( in terms of number of test) | 2,870,400.00 | 2,870,400.00 | Based on current Maximum Number of Patients | ||
| DRG Test | 4,600.00 | 4,600.00 | |||
| others - 50% test | 2,300.00 | 2,300.00 | |||
| Assumed machine is running 24 hrs and 6 days a week. | |||||
| array machine can run a maximum | Sample | ||||
| 40 patient samples | 20 test can be perfomed | 2 hours | |||
| Technician Time | 1 hours | ||||
| Deduct One hour time based on technician Time for Calculation. So, based on the scenario above it would be better for the Hospital to: 1.) It is recommended to go for the machine if number of test go beyond this limit. 2.) Since, our Existing arrangement provide 50% of contribution Hence only 40% of revenue each in terms of incremental revenue is coming from machine purchase inhouse from this point of view it is recommended to go for this machine if it goes beyond it\'s BEP level. 3.) Even if Hospital does not go to salable BEP then, it is still recommended to go for the machine in the long run as waiting period of two days to get the test report is removed. 4.) Clinical test conducted at present which only provide positive/negative feedback based on patient report, But if machine is bought it will give the patient\'s whole details in order to deduce the decision. 5.) If Over a period of time customer\'s increase then, they can only be treated if the machine is inhouse. 6.) In coming period number of patients may further increase so it will reach BEP level will be reached. So, Based on the above analysis company may decide. |
