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Classifying for Differential, Opportunity, and Sunk Costs

Scenario: Northwest Hospital is a full service hospital that provides everything from major surgery and emergency room care to outpatient clinics. The hospital's Radiology Department is considering replacing an old inefficient X-ray machine with a state of the art digital X-ray machine. The new machine would provide higher quality X-rays in less time and at a lower cost per X-ray. It would also require less power and would use a color laser printer to produce easily readable X-ray images. Instead of investing the funds in the new X-ray machine, the Laboratory Department is lobbying the hospital's management to buy a new DNA analyzer.

Task: For each of the items listed below, indicate whether it should be considered a differential cost (DC), an opportunity cost (OP) or a sunk cost (SC) in the decision to replace the old X-ray machine with a new machine. If none of the categories apply for a particular item, please put (NA) next to the number for 'none apply'. Please list the number and the 2 digit abbreviation next to it so for example, 1 OC, 2 SC, etc.

1. Cost of the old X-ray machine.
2. The salary of the head of the Radiology Department.
3. The salary of the head of the Pediatrics Department.
4. Cost of the new color laser printer.
5. Rent on the space occupied by radiology.
6. The cost of maintaining the old machine.
7. Benefits from a new DNA analyzer.
8. Cost of electricity to run the X-ray machines.

Solution Preview

First, let us define our terms. A differential cost (DC) is a cost that will change based upon the decision being made. An opportunity cost (OC) is the benefit lost by a decision being made. A sunk cost (SC) is a cost which was incurred before the decision was made; therefore, making the decision will not change the cost. We will list any cost that was not incurred before the decision was made, but that will ...

Solution Summary

This solution applies three different economics-based concepts: differential costs, opportunity costs and sunk costs, to various decisions being made at a medical institution. Additionally, this solution provides definitions to differentiate all the terms being used and completed this response in about 300 words.