Expand-or-reduce. The administrator of ABC Hospital, Mr. Stevens, has just received the latest financial report, and the news is not good. The hospital has been losing money for over a year, and if things don’t improve, it may lose its AA bond rating. Stevens has met with his vice president of finance, Mr. Sanger, and has asked him to identify areas for cutting costs, beginning with services that are operating at a loss. The following information is for services provided at ABC Hospital’s ambulatory care clinic:

a. Suppose that all fixed costs are avoidable. What should Sanger recommend to Stevens regarding dropping the clinic?

b. What if only $300,000 of the fixed costs were avoidable? Would this change his recommendation?

c. Are there any other considerations that should be taken into account when making this decision?

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Annual volume (in patient visits) 7,000 Charge per visit $155 Variable cost per visit $45 Fixed costs $700,000