PHARM487 Lecture 2: Lung Anatomy
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Health Care Financial Management II | ||||||||
Practical Exercise in Sunk Cost Analysis | ||||||||
On January 1, 2007, Mr. DMB, CFO for the Warehouse Health System, purchased a new CT scan for the radiology department | ||||||||
after evaluating cost and quality of CT scans from five (5) vendors. The purchase price of the CT scan was $1 million dollars. | ||||||||
The cost per procedure in technical and professional labor and supplies is $650 dollars. | ||||||||
On February 1, 2007, one of the radiologist on staff informed Mr. DMB of a CT scan that would significantly decrease the | ||||||||
cost per procedure to $325 per procedure. The purchase price for CT scan # 2 is $1.1 million dollars. | ||||||||
1) What should Mr. DMB, CFO do? Should he purchase CT Scan # 2? | ||||||||
2) What additional informantion is needed to make a decision to purchase CT Scan # 2? | ||||||||
3) What could have been done to avoid this situation, if at all? | ||||||||
4) Utilize the speadsheet model to anaylze changes in cost per procedure, revenue changes, volume changes. | ||||||||
5) What suggestions would you provide Mr. DMB if a) he did purchase CT Scan # 2, b) if he did NOT purchase | ||||||||
CT Scan # 2? | ||||||||
Assume the volume is projected to cap at 5000 procedures. | ||||||||
Janaury 1, 2007 | February 1, 2007 | |||||||
CT Scan # 1 | CT Scan # 2 | |||||||
Initial Cost | ($1,000,000) | ($1,100,000) | ||||||
Volume: # of procedures | 5000 | 5000 | ||||||
cost per procedure | $650 | $325 | ||||||
Total Variable Cost | $3,250,000 | $1,625,000 | ||||||
Net Revenue per procedure | $1,000 | $1,000 | ||||||
Net Revenue | $5,000,000 | $5,000,000 | ||||||
Net profit without fixed cost | $1,750,000 | $3,375,000 | ||||||
Add Back Initial Cost | ($1,000,000) | ($1,100,000) | ||||||
Profit | $750,000 | $2,275,000 | ||||||