You have the option to purchase a Robotic Surgery Machine to perform the surgica

Question

You have the option to purchase a Robotic Surgery Machine to perform the surgical operations. The machine has a cost of 1,500,000 dollars, but the Medicare payment for a surgical operation using the Robotic Surgery Machine is 2,500 dollars and a surgical operation using a Robotic Surgery Machine has a lower cost per operation of 1,250 dollars.

a) Compute the total revenue, the total cost, and the profit at the end of each year if the hospital performs the surgical operations with the Robotic Surgery Machine.

b) For simplicity, assume the life of the machine is three years. In addition, assume the opportunity cost of funds (interest rate) is 10% per year. Should the hospital buy the machine?

Explanation / Answer

(A) The total fixed cost woul dbe cost of machinery : $1500000

Toatl variable cost is teh cost of surgery = 1250Q

Q= number of operations

Total revenue = 2500Q

Profit = Total revenue- total cost = 2500Q -(1500000+1250Q)

(b) WIth opportuntiy cost of 10% per year, the opportunity cost on cost of machinery would be

1500000x0.1 = 150,000

The total cost woudl now be = 1500000+150000+1250Q = 1650000+1250Q

Profit = 2500Q-1250Q-1650000 = 1250Q -1650000

Profit is zero at 1650000/1250 = 1320

If Q = 1320 or greater than 1320 units then the hospital should buy the machine.

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