An equipment acquisition proposal was being considered by a large health care or
ID: 364134 • 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.
Deliverables: The CEO of XYZ Health Care has hired your team as consultants to prepare a report addressing the following questions listed below. Submit one (1) single Microsoft Word document. is a group assignment.
•How many autoimmunity tests per year will have to be performed on the array machine to break even?
•Given the present volume of tests, would there be an annual net contribution and, if so, how much?
•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
Total annual fixed cost of array machine = depreciation + technician cost = 10000+15*52*6 = 14680
a) Autoimmunity tests per year to be performed on the array machine to break even = Annual fixed cost / revenue - variable cost) = 14680 / (20-2) = 816 tests
b) Present volume of tests = 5*6*52 = 1560
Difference in cost of laboratory testing and in house testing = Annual cost of laboratory testing - Annual cost of in house testing = 1560*10 - (14680 + 1560*2) = $ - 2,200
We see that cost of inhouse testing is more than laboratory testing, therefore , net contribution is negative.
c) Applicable tests = 1560*0.5 = 780
This volume is less than the breakeven volume required for the machine. Therefore, the equipment should not be acquired.