An Equipment Acquisition Proposal

An equipment acquisition proposal was being considered by a large health care organization. The

equipment, an array machine, will enable the hospital to perform five specific autoimmunity tests

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 the five tests is one of each test 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

breakeven?

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?

For each of the above questions, your response should provide a rationale and discussion regarding each step you take.