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Cost analysis

As vice president for Ambulatory Clinical Services for a small community hospital, you oversee various laboratory operations. To familiarize yourself with costs of operating the ECG (electrocardiography) laboratory, you do some simple breakdown of costs. Aside from equipment costs, you find that:

1. It takes about 15 minutes for the ECG technician to administer a test.
2. The ECG technician's pay is $25 per hour, including fringe benefits, or $52,000 per year.
3. Supplies for each test cost $3.
4. The lab has the capacity to do 8,300 tests per year at current capacity, although it is operating at 90% of capacity.
5. Costs for space, utilities, and depreciation amount to $25,000 per year.

Given the above:
a. Identify the fixed costs and the variable costs.
b. What are the total fixed costs, total variable costs, and total cost of the lab given its current capacity? What is the average cost per test at current capacity?
c. What is the average cost of a test if the lab runs at 100% of capacity and at 65% of capacity?
Answer the following three parts assuming the volume of tests performed increases from 90% to 100% of capacity.
d. What is the incremental cost of a test?
e. How does the incremental cost change if the union successfully negotiates a 3.5% annual increase in wages after the lab reaches 100% of capacity?
f. Compare the incremental cost figures for (d) and, (e) above and explain why they differ or do not differ.

Please write out all steps in detail so that I can be prepared to do one of these myself. This is a study guide for a final exam.

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Solution Summary

The solution explains fixed, variable and incremental costs