Question

Millbridge Ambulance Service (MAS) has been considering consolidating its three locations into just two locations. The location MAS is considering closing currently costs $155,000 to operate. If the location is closed, the ambulances from that location would be moved to the other two locations. The savings from the closure would be partially offset by increased expenses at the two remaining locations. MAS will lose $40,000 of state subsidy if it closes the location. MAS wants to close the location only if the closure results in an overall financial improvement. The current costs of the location are as follows: The general and administrative expenses of $20,000 are an allocation of costs from the central office. The costs of the central office are not affected by the existence of the specific locations. If the location is closed, the staff will be transferred to the other two locations, and the lease will be canceled, so there will be no rent or repairs and maintenance. While it will not purchase supplies for this location, the supply cost of the other two locations will rise by $20,000. What should MAS do?

Answer 1

Millbridge Ambulance Service (MAS) should not go ahead with consolidating its three locations into two because it will have a negative cost savings of $5,000.

What are cost savings?

Cost savings refer to the benefits that Millbridge can realize from some actions that reduce its expenses or costs.

Cost savings are derived from cost minimization strategies.

Data and Calculations:

Salaries of staff = $80,000

Rent = $20,000

Repairs/Maintenance = $10,000

General /Administration = $20,000

Supplies = $25,000

Total = $155,000

Savings in costs:

Loss of state subsidy = -$40,000

Rent = $20,000

Repairs/Maintenance = $10,000

Supplies = $5,000 ($25,000 - $20,000)

Total savings = -$5,000

Thus, Millbridge Ambulance Service (MAS) should not go ahead with consolidating its three locations into two because it will have a negative cost savings of $5,000.

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