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Weekly technician charges ($ 15 * 6) = $ 90
The charges are multiplied by 6 because there are 6 days between Monday and Saturday. The charge of $ 15 per hours is also on a daily basis.
1 year has 52 weeks
Annual technician charges, ($ 90* 52) = $ 4,680
Annual fixed costs= ($ 10,000 + $ 4, 680) = $ 14, 680
Annual depreciation and the annual technician costs are fixed costs because they will be incurred regardless of whether tests are run or not.
Contribution margin= selling price- variable cost
Selling price= charge per patient= $ 20 per test
Variable cost= cost of reagents= $ 2 per test
Cont. margin= $ 20-$2= $ 18 per unit
B.E.P, quantity = $ 14, 680/ $ 18 per unit
= 815.55 autoimmunity tests
= 816 tests
There would a contribution margin of $ 13,400.
Annual net contribution
Less: (Variable costs)
Less: fixed costs
5 tests a day from Monday- Saturday
5*6= 30 tests a week
1 year has 52 weeks,
30* 52= 1,560 tests a year
$ 20/ tests
Total sales revenue a year
$20* 1,560= $ 31,200
Total variable costs= $2 * 1,560= $ 3,120
Annual depreciation $ 10,000
Annual technician charges $ 4,680
Total sales revenue $ 31,200
Less: total variable costs ($ 3,120)
Contribution $ 28,080
Less: fixed assets
Annual depreciation ($ 10,000)
Annual technician costs ($ 4, 680)
Net annual contribution $ 13,400)
Total test per year is 1,560
We assume 1 test is equal to 1 patient
Half the total patients number will be 1,560/2= 780 patients
At break even, the profit is 0
Desired profit= 0
BEP= fixed costs in total+profitmargin contributed in unit = ($ 14, 680 + 0)/ ($20-$2)
=815. 55 patients
= 816 patients
The laboratory will not break even on the equipment if half of the patients have Medicare coverage (Longest, Rakich, & Darr, 2000).The number of half patients of 780 is lower than 816 which is the number of patients required to break even.
We will have to do a capital budgeting analysis of the project to see if the project is worthwhile.
Application of payback formula
Payback time = Preliminary investmentCash flow AnnuallyInitial investment is the purchase cost of the Machine which is $ 50,000.
Annual cash flows
Sales revenue- expenses
We will use the number of patients who are not under Medicare in a year of 780
Annual Sales revenue 780* $20= $ 15,600
Annual Variable expenses 780* $ 2= $ -1, 560
Less: technician costs $-4, 680
Total annual cash inflows $ 9,360
Depreciation is not included in the calculation as it is a non-cash expense, no actual cash is paid.
Payback period= $ 50,000/ $ 9,360= 5.34 years
The payback period is 5.34 years.
The hospital should not acquire the machine because the initial cost of investment of $ 50,000 will be recovered after 5 years which is way past the useful life of the machine of 5 years (Longest, Rakich, & Darr, 2000).
Longest, B.B., Rakich, J.S., & Darr, K. (2000). Managing health services organizations and system. Baltimore: Health Professions Press
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