AFM131 Lecture 12: AFM131 Module6-1
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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 | ||||||
Central Med Medical Clinic recently purchased an Electec model1555 mobile CT Scanner for $225,000. Typically CMMC depreciatestheir medical equipment over a 3 year life, but they believe thatthe usage of the new mobile device and technology of the field willrender the item obsolete within 1.5 years.
Which of the following depreciation methods would best allocate thecost of the CT scanner over it's estimated useful life?
A. | Straight Line method | |
B. | Units of Production method | |
C. | Allowance method | |
D. | Double Declining Balance method |