An administrator at Saint Jude Hospital is considering how to use some space made available when the

Question:

An administrator at Saint Jude Hospital is considering how to use some space made available when the outpatient clinic moved to a new building. She has narrowed her choices, as follows:

a. Use the space to expand laboratory testing. Expected future annual revenue would be $330,000; future costs would be $290,000.

b. Use the space to expand the eye clinic. Expected future annual revenue would be $500,000; future costs would be $480,000.

c. The gift shop is rented by an independent retailer who wants to expand into the vacated space. The retailer has offered $11,000 for the yearly rental of the space. All operating expenses will be borne by the retailer.

The administrator’s planning horizon is unsettled. However, she has decided that the yearly data given will suffice for guiding her decision.

Tabulate the total relevant data regarding the decision alternatives. Omit the concept of opportunity cost in one tabulation, but use the concept in a second tabulation. As the administrator, which tabulation would you prefer if you could receive only one?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...