Opportunity cost flips the answer; the caveats decide it

The same clinic, now worth closing

Lesson 12.2 ended with a condition: closing Westgate is right only if its space has a better use. Two offers arrive.

(a) Sublet. A physiotherapy practice will sublet the Westgate premises for 70,000 a year. Dropping the clinic costs Maplecrest its segment margin of 50,000 (the −50,000 difference from Lesson 12.2); subletting brings in 70,000 that keeping the clinic forgoes.

$$\text{Drop and sublet vs keep}=-50,000+70,000=+20,000$$

(b) Convert. Maplecrest could instead convert Westgate to an orthodontics service with a contribution margin of 180,000 and direct fixed costs of 90,000 — a segment margin of 90,000.

$$\text{Drop and convert vs keep}=-50,000+90,000=+40,000$$

Nothing about Westgate has changed. It still earns 50,000. What changed is that keeping it now forgoes something: the 70,000 sublet or the 90,000 orthodontics margin is the opportunity cost of the general-dentistry clinic, and once it exceeds 50,000 the clinic is the wrong use of the space. The general rule for an alternative use: differential = (fixed costs avoided − contribution lost) + net benefit of the alternative use. The first bracket is the −50,000 from the plain keep/drop; the second is the new line.

A weaker offer shows the flip in reverse. A sublet at 40,000 gives −50,000 + 40,000 = −10,000: keep the clinic. The threshold is the segment margin itself — an alternative use is worth taking only when its net benefit exceeds what the segment earns.

Option                       vs keep    One-time cost      Reversible?
Keep Westgate                     0     none               —
Drop and sublet at 70,000   +20,000     fit-out for tenant 3-year lease, then yes
Drop and convert to ortho   +40,000     equipment, hiring  hard — specialist kit
Drop and sublet at 40,000   −10,000     fit-out for tenant reject

The qualitative ledger

The numbers say convert. A written answer that stops there earns half the marks, because the numbers cannot hold everything the decision involves, and the qualitative factors can outweigh them. The six the course names:

1. Quality of the service the company will deliver afterwards — an orthodontics service Maplecrest has never run.
2. Supplier or partner reliability — will the physiotherapy tenant pay for three years?
3. Employee morale — Westgate’s dentists and hygienists: redeployed, or severance?
4. Customer perception — Westgate’s patients lose their neighbourhood clinic; some will follow to Northfield, some will leave the group.
5. Flexibility — a sublease ends; a converted clinic with specialist equipment is hard to reverse.
6. Community and ESG — access to dental care in the Westgate neighbourhood, the group’s reputation.

Each factor has a direction: it argues for or against the option, and the answer says which. Referral flow argues for keeping (patients refer family across clinics). Flexibility argues for the sublet over the conversion. Access argues against both closures. The recommendation weighs them against the 20,000 or 40,000 and takes a position — the exam rewards a defended position, not a list.

Presenting it

The shape of the answer: the number (+20,000 for the sublet, its basis: 70,000 forgone less 50,000 segment margin) · the opportunity cost named as such · at least two qualitative factors with their direction · the counter-position acknowledged · a conclusion consistent with the reasoning. Whether the conclusion is “close” or “keep” matters less than whether it follows from what was weighed.