Complex Make/Buy. Dr Mike Roe is the Medical Director of the labs at Parkside Hospital, the acute care provider for the Sunstone HMO. The lab is looking to reduce its costs to remain competitive in the capitated market. One service that the laboratory offers is in-house cyclosporin (an anti-rejection drug)

assays for immuno-compromised (low tolerance to infection) patients. This is a low-volume, fairly expensive procedure. Recently, Loache Laboratories, a reference lab, offered to perform these studies for Parkside. Loache has offered to produce the necessary results at a cost of $70 each. Parkside has projected the following data for the upcoming year to continue to perform the test in-house:

a. Should Parkside continue to perform the assays or purchase them from Loache?

b. Assume that it was highly likely that the volume would not reach 960 assays.
At what volume should Dr Roe change his decision from the first question?

c. If Loache discounted the price by 10 percent for each test after the purchase of 900 assays, what should Dr Roe’s decision be?

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Volume: 960 tests or assays Patient charges per lab test: $75 Variable expenses per lab test: $28.63 Annual expenses associated with Cyclosporin: Rent: $10,000 Equipment rental: $9,250 Laboratory technician salary: $18,400 Allocated overhead: $6,840