1. Classify the costs associated with the cardiac catheterization activity into one of the following: (1) committed costs, or (2) discretionary costs. 2. Calculate the total cost of cardiac catheterization testing and determine the total cost per procedure if 5,000 procedures are conducted. Then break the cost per procedure into fixed and variable components. Now, which costs are relevant and which costs are irrelevant with respect accepting or rejecting the offer? Explain your reasoning. 3. Assume that SJMC will accept the offer if it will cover some of the company’s operating costs. Should the offer be accepted? Eldenburg, Wolcott, Chen, Cook, Cost Management, Measuring, Monitoring, and Motivating Performance, 3 rd Cdn Ed., Wiley & Sons. 2016, 659 p. 4. Jerold Bosserman, SJMC's hospital controller, argued against accepting the offer. Instead, he argued that SJMC should be increasing the charge per procedure rather than accepting business that doesn't even cover full costs. He also was concerned about possible reaction of local physicians if word got out that Family Physicians 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 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 Family Physicians’ offer? 6. Assuming that SJMC wants to bring in the same revenues earned in the cardiac catheterization department’s first year less the reduction in spending attributable to using only four technicians. In that case, how much must SJMC charge for each procedure
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t. John's Medical Testing Center (SJMC), which provides services such as x-rays, CAT scans, MRIs, etc., 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. |
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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 medical centre in the city 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 At the beginning of the second year, Family Physicians Inc., a centre with 6 practicing doctors 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. Family Physicians estimates that it will send over about 500 patients per year. Family Physicians has indicated that the arrangement is temporary—for one year only. They expect to have a medical centre closer to their location with its own testing capabilities within one year. Required: |
1. Classify the costs associated with the cardiac catheterization activity into one of the following: (1) committed costs, or (2) discretionary costs.
2. Calculate the total cost of cardiac catheterization testing and determine the total cost per procedure if 5,000 procedures are conducted. Then break the cost per procedure
into fixed and variable components. Now, which costs are relevant and which costs are irrelevant with respect accepting or rejecting the offer? Explain your reasoning.
3. Assume that SJMC will accept the offer if it will cover some of the company’s operating costs. Should the offer be accepted?
Eldenburg, Wolcott, Chen, Cook, Cost Management, Measuring, Monitoring, and Motivating Performance, 3
rd
Cdn Ed., Wiley & Sons. 2016, 659 p.
4. Jerold Bosserman, SJMC's hospital controller, argued against accepting the offer. Instead, he argued that SJMC should be increasing the charge per procedure rather than accepting business that doesn't even cover full costs. He also was concerned about possible reaction of local physicians if word got out that Family Physicians 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 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 Family Physicians’ offer?
6. Assuming that SJMC wants to bring in the same revenues earned in the cardiac catheterization department’s first year less the reduction in spending attributable to using only four technicians. In that case, how much must SJMC charge for each procedure?
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