St. John’s Medical Center (SJMC) has five medical technicians who are responsible for conducting cardiac catheterization testing in SJMC’s Cath Lab. Each technician is paid a salary of $36,000 and is capable of conducting 1,000 procedures per year. The cardiac catheterization equipment is one year old and was purchased for $250,000. It is expected to last five years. The equipment’s capacity is 25,000 procedures over its life.
At the beginning of the second year, an HMO from a neighboring community approached SJMC and offered to send its clients to SJMC for cardiac catheterization provided that the charge per procedure would be $550. The HMO estimates that it can provide about 500 patients per year. The HMO has indicated that the arrangement is temporary—for one year only. The HMO expects to have its own testing capabilities within one year.
Required:
- 1. Classify the resources associated with the cardiac catheterization activity into one of the following: (1) committed resources, or (2) flexible resources.
- 2. Calculate the activity rate for the cardiac catheterization activity. Break the activity rate into fixed and variable components. Now, classify each activity resource as relevant or irrelevant with respect to the following alternatives: (1) accept the HMO offer, or (2) reject the HMO offer. Explain your reasoning.
- 3. Assume that SJMC will accept the HMO offer if it reduces the hospital’s operating costs. Should the HMO offer be accepted?
- 4. Jerold Bosserman, SJMC’s hospital controller, argued against accepting the HMO’s offer. Instead, he argued that the hospital should be increasing the charge per procedure rather than accepting business that doesn’t even cover full costs. He also was concerned about local physician reaction if word got out that the HMO was receiving procedures for $550. Discuss the merits of Jerold’s position. Include in your discussion an assessment of the price increase that would be needed if the objective is to maintain total revenues from cardiac catheterizations experienced in the first year of operation.
- 5. Chandra Denton, SJMC’s administrator, has been informed that one of the Cath Lab technicians is leaving for an opportunity at a larger hospital. She met with the other technicians, and they agreed to increase their hours to pick up the slack so that SJMC won’t need to hire another technician. By working a couple hours extra every week, each remaining technician can perform 1,050 procedures per year. They agreed to do this for an increase in salary of $2,000 per year. How does this outcome affect the analysis of the HMO offer?
- 6. Assuming that SJMC wants to bring in the same revenues earned in the cardiac catheterization activity’s first year less the reduction in resource spending attributable to using only four technicians, how much must SJMC charge for a procedure?
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Chapter 17 Solutions
EBK CORNERSTONES OF COST MANAGEMENT
- St. John's Medical Center (SJMC) has five medical technicians who are responsible for conducting cardiac catheterization testing in SJMC's Cath Lab. Each technician is paid a salary of $36,000 and is capable of conducting 1,000 procedures per year. The cardiac catheterization equipment is one year old and was purchased for $250,000. It is expected to last five years. The equipment's capacity is 25,000 procedures over its life. Depreciation is computed on a straight-line basis, with no salvage value expected. The reading of the catheterization results is conducted by an outside physician whose fee is $120 per test. The technician's report with the outside physician's note of results is sent to the referring physician. In addition to the salaries and equipment, SJMC spends $50,000 for supplies and other costs needed to operate the equipment (assuming 5,000 procedures are conducted). When SJMC purchased the equipment, it fully expected to perform 5,000 procedures per year. In fact, during…arrow_forwardAlva Community Hospital has five laboratory technicians who are responsible for doing a seriesof standard blood tests. Each technician is paid a salary of $30,000. The lab facility representsa recent addition to the hospital and cost $300,000. It is expected to last 20 years. Equipmentused for the testing cost $10,000 and has a life expectancy of 5 years. In addition to the salaries,facility, and equipment, Alva expects to spend $200,000 for chemicals, forms, power, and othersupplies. This $200,000 is enough for 200,000 blood tests.Required:Assuming that the driver (measure of output) for each type of cost is the number of blood testsrun, classify the costs by completing the following table. Put an X in the appropriate box forvariable cost, discretionary fixed cost, or committed fixed cost.arrow_forwardJohnson Family Care Inc. is a large ambulatory care center that provides comprehensive 24-hour primary and specialty care to a large suburban population in Pennsylvania. The center recently purchased new clinical laboratory equipment for $1.2 million and spent $22,000 to renovate a center room to accommodate the new equipment. The useful life of the equipment is estimated to be ten years, after which it can be sold for $70,000. Johnson uses a straight-line method to calculate book depreciation and pays tax at a rate of 40 percent. The equipment falls into the MACRS seven-year class. a. What annual depreciation expense will be reported on the income statement for the center? b. What annual depreciation expense will be reported for tax purposes? c. Suppose Johnson sells the laboratory equipment at the end of Year 4 for $400,000. What impact would this have on the taxes paid by the center? ANSWER Capital cost Renovation cost Salvage value Useful life Annual depreciation expense b.…arrow_forward
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- The registration advisors at a small Midwestern university (SMU) help 4,200 students develop their class schedules and register for classes each semester. Each advisor works for 10 hours a day during the registration period. SMU currently has 10 advisors. While advising an individual student can take anywhere from 2 to 30 minutes, it takes an average of 12 minutes per student. During the registration period, the 10 advisors see an average of 300 students a day on a first-come, firstserved basis. The head of the registration advisors at SMU has decided that the advisors must finish their advising in 2 weeks (10 working days) and therefore must advise 420 students a day. However, the average waiting time given a 12-minute advising period will result in student complaints, as will reducing the average advising time to 10 minutes. SMU is considering two alternatives: a. Hire two more advisors for the 2-week (10-working day) advising period. This will increase the available number of…arrow_forwardThe registration advisors at a small Midwestern university (SMU) help 4,200 students develop their class schedules and register for classes each semester. Each advisor works for 10 hours a day during the registration period. SMU currently has 10 advisors. While advising an individual student can take anywhere from 2 to 30 minutes, it takes an average of 12 minutes per student. During the registration period, the 10 advisors see an average of 300 students a day on a first-come, firstserved basis. The head of the registration advisors at SMU has decided that the advisors must finish their advising in 2 weeks (10 working days) and therefore must advise 420 students a day. However, the average waiting time given a 12-minute advising period will result in student complaints, as will reducing the average advising time to 10 minutes. SMU is considering two alternatives: a. Hire two more advisors for the 2-week (10-working day) advising period. This will increase the available number of…arrow_forwardThe registration advisors at a small Midwestern university (SMU) help 4,200 students develop their class schedules and register for classes each semester. Each advisor works for 10 hours a day during the registration period. SMU currently has 10 advisors. While advising an individual student can take anywhere from 2 to 30 minutes, it takes an average of 12 minutes per student. During the registration period, the 10 advisors see an average of 300 students a day on a first-come, firstserved basis. Q. The head of the registration advisors would like to increase the number of students seen each day because at 300 students a day it would take 14 working days to see all of the students. This is a problem because the registration period lasts for only 2 weeks (10 working days). If the advisors could advise 420 students a day, it would take only 2 weeks (10 days). However, the head advisor wants to make sure that the waiting time is not excessive. What would be the average waiting time if 420…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning