A hospital is evaluating whether to outsource or perform in-house a large set of blood and urine laboratory tests. The fixed cost of the laboratory located in the hospital is $800,000, and the weighted average variable cost per test if performed in-house is $28.75. A third-party lab located one city block from the hospital will perform the same tests and distribute the results electronically to the hospital at a price of $32.00. If the annual volume last year was 250,000 tests, the hospital should:
A) outsource these lab tests to this third-party lab.
B) offshore these lab tests to this third-party lab.
C) perform these lab tests in-house at the hospital.
D) reduce fixed costs $200,000 and then outsource.

Question

Quizplus · Accepted Answer

The in-house cost for 250,000 tests is $800,000 (fixed) + ($28.75 * 250,000) = $7,187,500. Outsourcing at $32.00 per test for 250,000 tests would cost $8,000,000. Therefore, performing the tests in-house is cheaper.

A Hospital Is Evaluating Whether to Outsource or Perform In-House