In 2005, Doctora's Regional Hospital's Chief Executive Office (CEO) conducted performance reviews of the hospital's departments....

 

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In 2005, Doctora's Regional Hospital's Chief Executive Office (CEO) conducted performance reviews of the hospital's departments. The chief of oncology proposed increasing the number of patients (for chemotherapy) that enters their department. The additional cost that the department of oncology will incur is Php 3,000,000. The CEO examined the department's financial statements and found that the average cost (AC) of chemotherapy was Php 700,000 higher than its average revenue. He asked what seemed like a reasonable question, "Why would we want to increase the number of patients if we are losing huge amount of money?". Requirement: a. The CEO is committing the fixed-cost fallacy. Explain what this fallacy is and how is this committed? b. Assuming the CEO hired you as a consultant, how would you approach this problem? In 2005, Doctora's Regional Hospital's Chief Executive Office (CEO) conducted performance reviews of the hospital's departments. The chief of oncology proposed increasing the number of patients (for chemotherapy) that enters their department. The additional cost that the department of oncology will incur is Php 3,000,000. The CEO examined the department's financial statements and found that the average cost (AC) of chemotherapy was Php 700,000 higher than its average revenue. He asked what seemed like a reasonable question, "Why would we want to increase the number of patients if we are losing huge amount of money?". Requirement: a. The CEO is committing the fixed-cost fallacy. Explain what this fallacy is and how is this committed? b. Assuming the CEO hired you as a consultant, how would you approach this problem?

Answer rating: 100% (QA)

a The fixedcost fallacy occurs when decisionmakers focus solely on the incremental or variable costs ... View the full answer