Question

a specialty hospital is for sale. it has a market share of 5 percent and a cost per case of $1,000. overhead represents 20 percent of its costs. two bidders have emerged. nsh is a specialty hospital company that does not have any facilities in the area. nsh has a cost per case of $1,200. lss operates another specialty hospital in the area. lss has a 10 percent market share and a cost per case of $850 (overhead is 25 percent of costs). you anticipate that lss will be the winning bidder group of answer choices because it will have higher markups after the merger. because it should be able to reduce overhead as a result of the merger. because it should be able to maintain or lower costs than nsh. all of the above

Answer 1

LSS is likely to win the bidding for the specialty hospital as it can potentially reduce overhead through the merger and maintain or lower costs than its competitor NSH. Understanding when to continue business or shut down depends on whether revenues cover the variable costs, contributing to the fixed costs. The Raspberry Farm example also shows that if price is below average variable cost, shutting down minimizes losses.

Step-by-step explanation:

The question addresses a scenario involving the sale of a specialty hospital with a market share of 5 percent and a cost per case of $1,000, with overhead representing 20 percent of its costs. Two bidders, NSH and LSS, have different operating costs and market shares in the area. LSS is anticipated to be the winning bidder because it already operates another specialty hospital in the area with a 10 percent market share and lower costs per case at $850, with overhead being 25 percent of costs.

LSS has several advantages that make it the likely winning bidder; it should be able to maintain or lower costs more effectively than NSH, which has higher costs per case. Moreover, LSS could potentially reduce overhead as a result of the merger due to economies of scale and consolidating operations. Finally, the merger may permit higher markups, due to the increased market share.

To further understand this decision-making process, let's consider an example where a center earns revenues of $20,000 and has variable costs of $15,000. The center should continue in business since it is covering its variable costs and contributing towards fixed costs. However, if the center only earns revenues of $10,000 with the same variable costs, it should shut down, as it is not able to cover variable costs and is incurring losses.

The concept of shutting down where price is below average variable cost can also be illustrated through the scenario of the Raspberry Farm in Figure 8.6, where shutting down minimizes losses because the price per pack is not sufficient to cover the variable costs, and the farm would only need to cover its fixed costs.