cost analysis

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Case For Project – Cost Analysis*

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.

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?

 The response should be 8-10 slides including charts. Power Point is
the preferred format for this assignment.

The response should provide a rationale and discussion regarding each step
you take. Create a narrated PowerPoint presentation (be sure to include a
transcript of the narrated portion – or you may include the transcript of the
narrative in the notes section of the slide). Be sure to let me know where the
transcript is located if you decide to create a narrated presentation.

Question 1: Breakeven =Fixed Cost/Price-Variable Costs

Question 2:  P(x) = FC
+ VC(x) + NC


P= price


FC=Fixed Costs

VC= Variable Costs

NC=Net Contribution

Question 3: List out pro’s for purchase or con’s for
purchase. Be thorough and make a yes or no decision.

Sometimes students have difficulty uploading Excel spreadsheets into the
Power Point. If this is the case for you, please just upload the Excel
Spreadsheet separately.

*Longest, B.B., Rakich, J.S., & Darr, K. (2000). Managing health
services organizations and system. Baltimore:
Health Professions Press.

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