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 VP 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 by ABC Hospital's ambulatory care clinic: Annual volume in patient visits: 7,000 Charge per visit: $155 Variable cost per visit: $45 Avoidable Fixed costs: $300,000 Calculate the impact on the product margin if ABC drops the ambulatory care clinic. What should Mr. Sanger recommend to Mr Stevens regarding the dropping the clinic? You will enter DROP or KEEP as your answer.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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 VP 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 by ABC Hospital's ambulatory care clinic:
- Annual volume in patient visits: 7,000
- Charge per visit: $155
- Variable cost per visit: $45
- Avoidable Fixed costs: $300,000
- Calculate the impact on the product margin if ABC drops the ambulatory care clinic.
- What should Mr. Sanger recommend to Mr Stevens regarding the dropping the clinic? You will enter DROP or KEEP as your answer.
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