Scenario 4.6 Burdell Labs Is a Diagnostic Laboratory That Does Various Tests

question 58

Multiple Choice

Scenario 4.6
Burdell Labs is a diagnostic laboratory that does various tests (blood tests, urine tests, etc.) for doctors' offices in the Indianapolis area. 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 per week is projected at an additional 200 units through year 5 (i.e., 1,200 per week in year #1, 1,400 per week in year #2, etc.) . Pre-tax profits are expected to be $5 per test throughout the 5-year planning period. Two alternatives are being considered:
1) Expand both Test Centers A and B at the end of year 0 to a capacity of 2,000 units per week, at a total cost for both Test Centers of $300,000;
2) Expand Test Center A at the end of year 0 to 1,500 units per week, matching Test Center B, at a cost of $100,000, then expanding both Test Centers to 2,000 units per year at the end of year 3, at an additional cost at that time of $250,000.
Burdell Labs will not consider projects that don't show a 5th year positive net present value using a discount rate of 15%.
-Use the information in Scenario 4.6. What action, if any, should the Burdell Labs take?

• A) Do nothing-neither alternative provides a positive net present value after five years.
• B) Select Alternative #1.
• C) Select alternative #2.
• D) Either alternative may be selected, since the positive net present values are the same after five years.

---

Definitions:

Cash

Liquid assets held by a firm, used to meet short-term obligations or for transactions; the most basic form of company resources.

Cost Model

An accounting method where an asset is valued based on the historical cost minus any accumulated depreciation and impairment costs rather than its current market value.

Initial Recognition

refers to the first time an entity records an asset, liability, equity, income, or expense based on its recognition criteria in the accounting records, establishing its inclusion in the financial statements.

Accumulated Depreciation

The total amount of depreciation expense that has been charged against an asset over its life up to a specific date.