Problem
Resource Usage, Special Order
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 its first year of operation, 5,000 procedures were run. However, a larger hospital has established a clinic in the city and will siphon off some of SJMC's business. During the coming years, SJMC expects to run only 4,200 cath procedures yearly. SJMC has been charging $850 for the procedure-enough to cover the direct costs of the procedure plus an assignment of general overhead (e.g., depreciation on the hospital building, lighting and heating, and janitorial services).
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 $550. The HMO estimates that it can provide about 500 patients per year. The HMO has indicated that the arrangement is temporary-for one year only. The HMO expects to have its own testing capabilities within one year.
Task
I. Which of the resources associated with the cardiac catheterization activity can be classified as committed resources?
Cardiac catheterization equipment and techniciansOutside physician reading of resultsSupplies and other costsCardiac catheterization equipment and technicians
Which of the resources associated with the cardiac catheterization activity can be classified as flexible resources?
Cardiac catheterization equipment and techniciansOutside physician reading of results and Cardiac catheterization equipmentSupplies and other costs, Outside physician reading of resultsSupplies and other costs, Outside physician reading of results
II. Calculate the activity rate for the cardiac catheterization activity. Break the activity rate into fixed and variable components.
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Activity rate
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$fill in the blank 3
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per procedure
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Fixed activity rate
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$fill in the blank 4
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per test
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Variable activity rate
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$fill in the blank 5
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per test
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Which of the activity resources are relevant with respect to the following alternatives: (i) accept the HMO offer, or (ii) reject the HMO offer?
Depreciation and technician salariesSupplies and other costs, and outside physician reading of resultsSupplies and other costs, and outside physician reading of results
III. Assume that SJMC will accept the HMO offer if it reduces the hospital's operating costs. Should the HMO offer be accepted?
IV. 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? If rounding is required, round your answer to the nearest dollar.