Wagner Hospital anticipates that it will have 50,000 patient days next year. This is substantially below its capacity of 70,000 patient days per year. The hospital has variable costs of $150 per patient day. Its fixed costs are $3,000,000 per year.

a. Calculate the average cost per patient day for Wagner Hospital at a volume of 50,000 patient days and at 60,000 patient days.

b. Assume that an HMO offers to generate 10,000 patient days per year. It currently sends no patients to Wagner Hospital.

It is willing to pay a maximum flat amount of $180 per patient day.

Assuming that its case-mix is similar to the current 50,000 patient days, should we accept its business?