WMBA 6608 Week 4 Break-Even Decision Memo Example

Memorandum

To: Vice President, Ambulatory Services, Prairie Ridge Medical Center

From: Decision Support Analyst

Date: April 20, 2026

Re: Whether to close the outpatient sleep disorders center

Recommendation

Do not close the sleep disorders center. Restructure it from four beds and two technologists per night, five nights a week, to two beds and one technologist per night, six nights a week. At the 560 in-lab studies projected for fiscal 2026, the restructured center would contribute about $42,000 a year toward overhead, while the current structure would lose about $117,000 on its avoidable costs. The center's reported loss after allocated overhead is real on paper but would not disappear if the center closed.

Cost Classification

Prairie Ridge Medical Center, an imaginary Iowa nonprofit, performed 640 in-lab sleep studies in fiscal 2025. Volume is falling as physicians order more home sleep tests.

Table 1

Sleep Center Costs by Behavior

Composite figures for a classroom case.

Datar and Rajan (2021) distinguish costs that change with a decision from those that do not; only the first group belongs in the decision. The overhead allocation, which covers shared services such as housekeeping and administration, would simply be spread over other departments if the center closed.

Contribution Margin and Break-Even

The center's blended net revenue is about $780 per in-lab study. With variable costs of $130, the contribution margin is $650 per study.

Current structure. Avoidable fixed costs total $481,200: staffing $343,200, director $60,000, lease $48,000 and front desk $30,000. Break-even on avoidable costs is $481,200 / $650, about 740 studies. Including allocated overhead, fixed costs reach $661,200 and break-even rises to about 1,017 studies, above the center's capacity of 1,000. At the projected 560 studies, contribution is $364,000, leaving an incremental loss of about $117,200.

Restructured center. Two beds, one technologist per night, six nights a week, gives capacity of about 600 studies a year. Staffing falls to 2.6 FTE, about $206,000, including coverage for leave; the lease falls to $26,000. Avoidable fixed costs become $322,000, and break-even on avoidable costs falls to about 495 studies. At 560 studies, contribution of $364,000 exceeds avoidable costs by about $42,000.

Table 2

Incremental Results at 560 Studies

The allocated overhead of $180,000 is excluded from all three, since no option removes it.

Answering the Decision Question

Closing beats the current structure by about $117,000 a year, which is why the center looks like a candidate for closure. But restructuring beats closing by about $42,000 a year, and it keeps in-lab testing available for patients who cannot be tested at home, such as those with suspected complex sleep disorders. Keel et al. (2017), reviewing hospital and clinic studies that applied time-driven activity-based costing, found that costing services by the resources they actually use often reveals costs that conventional allocations hide, and this case is an example: the allocated report shows a loss that no decision about the center can remove.

The costs that would genuinely disappear on closure are the $481,200 of staffing, director, lease and front desk costs. The $180,000 of overhead would not.

Sensitivity and Trigger

The restructured center depends on volume staying above about 495 studies. If home testing grows faster and volume falls to 450, the center would lose about $29,500 on avoidable costs. I recommend reviewing volume quarterly and revisiting closure if annual volume falls below 500 for two consecutive quarters. Reiter and Song (2021) present break-even volume as something to watch over time, telling managers in advance which volume should trigger a decision.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Keel, G., Savage, C., Rafiq, M., & Mazzocato, P. (2017). Time-driven activity-based costing in health care: A systematic review of the literature. Health Policy, 121(7), 755-763. https://doi.org/10.1016/j.healthpol.2017.04.013

Reiter, K. L., & Song, P. H. (2021). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.