7-24 Calculating product profitability using traditional and activity-based costing in a service setting (CIMA adapted) (LO 2, 3, 5) Lancaster Orthopedics spe- cializes in hip, knee, and shoulder replacement surgery. In addition to the actual surgery, the com- pany provides its patients with preoperative and postoperative inpatient care in a fully equipped hospital. Lancaster pays its surgeons a fixed fee for each surgical procedure they perform. The company provides doctors and patients a variety of support services during treat- ment and allocates the cost of these activities through the company's costing system, which uses a single overhead rate. Currently, the company uses an allocation rate of 65% of the surgical fee charged to the patient. Managers have expressed concern that the current system is producing inaccurate costs and profitability for the joint replacement procedures. As a result, Bree Lancaster, the com- pany's controller, initiated a study to explore the potential for implementing an activity- based costing system. She has collected the following data on each of the procedures. Hip Knee Shoulder Fee charged to patient $8,000 $10,000 $6,000 Number of procedures per year 600 800 400 Average time per procedure 2.0 hours 1.2 hours 1.5 hours Number of procedures per operating room session Inpatient days per procedure Surgeon's fee per procedure $1,200 $1,800 Medical supplies per procedure $400 $200 $300 $1,500 After analyzing the company's support activities, Bree determined that five activity cost pools would be sufficient for the company. The proposed activity cost pools, along with the pro posed cost drivers, are presented below. Activity Cost Driver Total Cost Operating room preparation Number of sessions $864,000 Operating room use Procedure time 1,449,000 Nursing and ancillary services Inpatient days 5,415,000 Administration Sales revenue 1,216,000 Miscellaneous Number of procedures 936,000 $9,880,000 Required a. Calculate the profit per procedure for each of the three procedures using the current basis for allocating overhead. b. Calculate the profit per procedure for each of the three procedures using the proposed activity-based costing system. C. Discuss the causes of the difference in profitability between the two costing systems. d. Based on the profit calculations, what action do you recommend