Westgate’s segment margin is 50,000 (dropping it alone costs the company 50,000). Its space could be (a) sublet for 70,000 a year, (b) converted to an orthodontics service with contribution margin 180,000 and direct fixed costs 90,000, or (c) sublet for 40,000 a year. Compute the differential of each option versus keeping the clinic (a disadvantage is negative).
Westgate’s segment margin is 50,000 (dropping it alone costs the company 50,000). Its space could be (a) sublet for 70,000 a year, (b) converted to an orthodontics service with contribution margin 180,000 and direct fixed costs 90,000, or (c) sublet for 40,000 a year. Compute the differential of each option versus keeping the clinic (a disadvantage is negative).
Answer
Drop and sublet vs keep → 20000 · Drop and convert vs keep → 40000 · Drop and sublet at 40,000 vs keep → -10000
Cells - Drop and sublet vs keep · ±0 - Drop and convert vs keep · ±0 - Drop and sublet at 40,000 vs keep · ±0 Differential = (fixed avoided − CM lost) + net benefit of the alternative use = −50,000 + benefit. Sublet 70,000: +20,000. Convert: 180,000 − 90,000 = 90,000 → +40,000. Sublet 40,000: −10,000 → keep. The threshold is the segment margin: an alternative use must beat 50,000.
Hermanson Vol 2 ch 22 (the better-use-of-the-space twist); Heisinger & Hoyle §7.9 (qualitative factors); OpenStax Accounting v2 §10.4