Cost Analysis: The Purchase of Health Care Equipment Team Project An equipment a
ID: 2578893 • Letter: C
Question
Cost Analysis: The Purchase of Health Care Equipment Team Project
An equipment acquisition proposal was being considered by a large health care organization, XYZ Health Care. 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.
1. How many autoimmunity tests per year will have to be performed on the array machine to break even?
2. Given the present volume of tests, would there be an annual net contribution and, if so, how much?
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?
Explanation / Answer
Step 1 - Calculation of Break even point.
Working Note 1 - Calculation of Contribution per test
Break even point
At Break even point is the point where Contribution meets the Fixed cost point and entity is in the position where No profit No loss ocurred. It is the minimum point for every entity for analysing the the minimum sales to be made to break even.
(1) Break even point (in tests)
(Fixed cost / Contribution per test)
(2) Break even point in Dollar value
(Fixed cost / Contribution ratio)
$55556
($50000/90%)
556 Tests.
($10000/$18)
Step 2 - Net Contribution calculation
Step 3 Cost analysis if patient have Medicare coverage.
1) Net Income if there is no Medicare coverage
$31200
(1560 test * $20)
$31200
(1560 test * $20)
$3120
($2 * 1560)
$15600
($10 * 1560)
$2480
($18080 - $15600)
Step 2 Net Income if there is 50% Medicare coverage
$9040
($1240 excess than off site test revenue $7800)
Analysis.
Based on the above calculations. It has been seen that purchase of array machine is still an valuable decision for organisation.
The hospital would be benefited from purchase of the asset over its life span of 5 years.
Acquisition would increase the revenue ultimately.
Such acquisition would also give the tax benefit because of depreciation of $10000 every year
Hence hospital should purchase the asset.
Particulars Amount Sales price (100%) $20 Variable cost (10%) $2 Contribution per test (90%) $18