COST ANALYSIS

Magnetic Resonance Imaging Facility

At Bee Cave Diagnostics, you have the opportunity to buy a new Magnetic Resonance Imaging (MRI) machine.

• Each machine costs $3 Million. Building the room with all its attendant safety protection and other ancillary costs increase the spend by an additional $2.0 million dollars per MRI suite. Each machine can perform 2000 scans per year.
• Each reading of an MRI scan by a radiologist, along with other per-scan-related costs, is $500 per scan.
• The machine will last five years.

1. Graph the total costs over 5 years as a function of sales for 0-3000 patients per year. Hint: at some point, you may need to add a second MRI.

2. Suppose that you want to make a profit of $500 per scan at a target volume of 1000 patients per year and you purchase only one machine. Superimpose the total revenue curve on top of the total cost curve in (1).

For the remainder of the homework, assume you only install one MRI at Bee Cave.

3. What is the resulting price at the target volume?

4. What is the breakeven volume at this price? What is the breakeven utilization? (Hint: remember you only have 1 line.)

5. What is the contribution margin and operating leverage at 1000 patients per year?

6. Suppose that you are rather unsure of the demand for the MRI given the other players in towna thousand patients might indeed use it per year, but then again maybe you could perform 2000 once it was known that you had an MRI convenient to the Bee Cave area. Or it may prove a boondoggle, such that you only get 100-200 patients per year. Alternatively, you could send your patients for MRIs to the downtown academic hospital. Being that you are in healthcare, you would not receive, of course, any referral fees. What would a risk-averse manager do, and why?