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1) The current cost function for a lab that evaluates Pap smears is C = 200,000 + 25 × Q

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1) The current cost function for a lab that evaluates Pap smears is C = 200,000 + 25 × Q. Q, the annual volume of tests, is forecast to be 30,000. Incremental cost is $25 because each evaluation requires $20 worth of a technician’s time and $5 worth of supplies. Calculate the average cost of an evaluation.

2) You are comparing replacing the current lab, which has a cost function of C = 200,000 + 25 × Q with an automated lab that has a cost function of C = 300,000 + 20 × Q. Doing so would reduce the error rate from 1.5 percent to 1 percent. Your volume is expected to be 18,000 tests per year. Should you choose the automated lab? Briefly explain your logic.