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Relevant Costing Differential Margins

I have had this question reviewed by an online tutorial assistant and would like to have it checked over by somebody else. I believe that the answer is correct but would still like a second opinion to be sure. I appreciate all the help the OTA has given me so far but believe that it is always prudent to gain a second opinion. So if you have time, could you please review the answer and provide any reasoning why you opinion may differ from the one provided.

I'll provide the question and the proposed solution. It is a differential margin question looking at the proposed addition to a department at the hospital. The topics we have studied so far have focused on incremental revenue and costing. We have not specifically talked about differential margins but I am assuming that this is the difference between the two.

Also I have a negative figure for each of the differential margins and have therefore chosen the one that is closest to zero. But the question also requires us to calculate a 'return on capital' for each option. Maybe I should leave out the opportunity costs when calculating the return on capital?

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Solution Preview

Hello, I reviewed the calculation and provided the solution.

CHECK
1.0   Average Cost: 1 2 3 4 5 Total
Cost of Machine $44,570 $44,570
Service Contract Cost $3,060 $3,366 $3,703 $4,073 $14,201
Service Call Costs $2,400 $2,640 $2,904 $3,194 $11,138
Supplies $2,800 $3,136 $3,512 $3,934 $4,406 $17,788
Personnel $59,000 $59,000 $59,000 $59,000 $59,000 $295,000
TOTAL $106,370 $67,596 $68,518 $69,540 $70,673 $382,698

Average Cost per Year $76,540

Analysis:

CHECK

Option A B C D
Number of Beds in Unit 8 8 8 8
Rate of Utilisation 40% 60% 40% 60%
No of Beds Used Per Day 3.2 4.8 3.2 4.8
Number of Days Per Year 365 365 365 365
Number ...

Solution Summary

The relevant costing for differential margins are examined. The opportunity costs when calculating the return on capital are given.

$2.19