BioMed Technologies is organized into several divisions, each of which focuses on a finding a genetics-based solution to distinct groups of diseases. BioMed's top management recently purchased the latest gene sequencing unit. The purchase was cost-justified based on usage of 2,500 hours for the first year, 3,000 the next year, and 4,000 hours (the practical capacity) for the remaining 3 years. The cost of the machine (operating costs, depreciation) is expected to be $10 million each year. It is now 6 months into the first year. Management is puzzled because actual use is less than 1,000 hours, even though all divisions had initially expressed (and continue to express) considerable interest in the technology. When asked, division management opines that they cannot afford to use the new machine.
Required:
a. Calculate the expected cost per hour for each of the five years, using expected volume as the denominator.
b. Repeat part (a) using practical capacity as the denominator volume.
c. Advise the top management of BioMed on how they might deal with the cost of unused capacity in the first two years.