Name: Day Class Meets: You are a department manager and need to recommend which

Question

Name: Day Class Meets: You are a department manager and need to recommend which new diagnostic equipment to purchase. Both provide equally quality results. Based on your financial analysis, which would you recommend purchasing? You must clearby present your financial analysis in an organized manner Diagnostic Equipment 1: Test volume: 100,000 exams for life of equipment Revenue: $15 revenue per exam Variable Cost: $5 variable cost per exam Equipment Cost: $400,000 w $0 salvage value Diagnostic Equipment 2: Test volume: 100,000 exams for life of equipment Revenue: $15 revenue per exam Variable Cost: $8 variable cost per exam Equipment Cost: $200,000 w $O salvage value Which diagnostic equipment do you recommend: Must present financial analysis below in organized clear manner.

Explanation / Answer

We need to calculate the contrubution of both equipments.

Contribution is Sales less variable cost

Contribution of Equipment I is :100000*15 - 100000*5

1500000- 500000 = 1000000

Contribution of Equipment II is : 100000*15 - 100000*8

1500000-800000= 700000

Now, we have to analyze the contribution given by each equipment in terms of cost of the equipment, which is the key factor

Equipment I contribution in terms of cost = 1000000/ 400000= 2.5

Equipment II contribution in terms of cost = 700000/200000 = 3.5

Since, contribution per cost of equipment II is higher, so we must recommend equipment II.

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