Question

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