Surgical Robot Arms Race Case Study Analysis Help With Solution

Introduction:
In the greater Seattle-Tacoma area, an arms race continues between hospitals to gather the most modern technology available to use on their patients – currently this arms race’s primary device of choice – robotic surgical systems. Why robotic surgical systems? These systems in theory allow surgeons to be more precise in performing complex surgical procedures on patients. With greater precision comes a greater chance of successfully healing the patient as well as reducing the patient’s possibility for complications and recovery time. In addition to these benefits, hospitals through the use of superior technology can serve more patients and potentially reap greater benefits from insurance companies and patients for these advanced medical services.

Questions:

1. What is the annual rate of interest being charged to the hospital? The total interest paid over the entire term of the lease?

2. Given this rate of interest, give some reasons on why or why not the hospital should accept this lease contract. Is this a good deal for the lessee?

3. Assume that the hospital has a current borrowing rate of 3.75% is this a capital lease or operating lease? Please explain each of the criteria and your conclusion based on ASC 840. Assume a 7 year life to the equipment, that there is no transfer of ownership to the lessee at the end of the lease term, and that there is no bargain purchase option?

4. Why would a hospital care whether it was a capital lease or an operating lease? When would one be an advantage over the other?

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5. Given the new situation, how does that affect questions 1-4? Would your answers be different and why?

6. If the contract were signed, what would be the first journal entry entered by the hospital. What would be the final journal entry? Are they the same or are they different? Why? What underlying principal would explain why they would be the same…? What underlying principal would explain why they would be different?

7. Calculate the contribution margin. Be sure to identify the variable versus the fixed expenses.

8. Based on the determination you made in the above question, discuss the break-even point in
number of cases per month. What are the implications associated with this number?

9. Determine the monthly payment for the new lease for the da Vinci robot.

10. Assuming that other existing variable and fixed costs carryover for the next 4 years and that this is an
operating lease, what is the net present value of the da Vinci robot assuming a 12% discount rate
and the ability to sell the robot for $500,000 at the end of the lease?

11. What is the new break-even point?

12. Is this a profitable venture for the hospital? If profitable, is it profitable enough? Why or why not? If
it is not profitable, should the da Vinci robot be discontinued? Why or why not?

13. So, what do you do? This question should be answered an in essay format with a clear beginning, middle and end. You should use transitions between paragraphs and be readable to a knowledgeable business person. This means you will need to discuss the IMA Code of Ethics and how it applies to this situation. This question should not exceed 5 pages double spaced. With that said, a one page answer will not suffice either.

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