An equipment acquisition proposal was being considered by a large health care or
ID: 3294487 • Letter: A
Question
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.
Given the present volume of tests, would there be an annual net contribution and, if so, how much?
Please explain.....
Explanation / Answer
Solution:
Analysis of the revenues/costs involved in buying the array machine or outsourcing the tests as done now:
Expected volume of tests = 5*6*52 = 1560 tests
Income from 1560 tests 20*1560 = $ 31,200
Net profit if the tests are outsourced = 31,200 -1560*10 = $ 15,600
Net profit if array machine is bought
Income 1560*20 =31,200
Less costs-Variable - reagents 3,120
Contribution 28,080
Less: Fixed costs:
Depreciation 10,000
Technician cost 4,680 14,680
Net profit 13,400 $
(Borrowing costs not given in the problem. Hence, not considered)
The annual contribution would be = $ 28,080 (if the machine is bought)