Question

NMC Labs is a diagnostic laboratory that does various tests (blood tests, urine tests, etc.) for doctors' offices. Test specimens are picked up at the doctors' offices and are transported to the testing facility, with uniform arrivals throughout the day. All tests go through two testing centers in the testing facility, Test Center A and Test Center B. A has a current capacity of 1,000 units per week, and B is capable of 1,500 units per week. The facility operates 50 weeks per year. This year (year 0 ), test volumes are expected to reach 1,000 units per week. Growth is projected at an additional 200 units each week through year 5. Pre-tax profits are expected to be $6 per test throughout the 5year planning period. Two alternatives are being considered: a) Expand both Test Centers A and B at the end of year O to a capacity of 2,000 units per week, at a total cost for both Test Centers of $300,000.

Answer 1

The student's question includes a business decision scenario for NMC Labs, considering whether to expand their testing capacity due to projected growth, with emphasis on maintaining profitability and ensuring sustainable operations.

Step-by-step explanation:

The student's question revolves around a scenario involving NMC Labs, a diagnostic laboratory that is experiencing growth in test volumes and is contemplating expansion. With a current capacity of 1,000 units per week at Test Center A and 1,500 units per week at Test Center B and annual operational timeframe of 50 weeks, the lab expects growth that will necessitate an increase in their capacity.

They are considering an expansion to 2,000 units per week for both centers at the end of year 0, and pre-tax profits are expected to be $6 per test for the upcoming five years.

The decision to expand the test centers should be made based on a calculation of expected demand, projected revenues and costs, and the anticipated return on the investment for the expansion, which would cost $300,000. The essential consideration is to ensure sustainable business operations and profitability.

An example provided indicates that if a center earns revenues of $20,000 and has variable costs of $15,000, it is advised for the center to continue in business because it is generating a positive contribution margin.