$.$ Average versus incremental costing. Suppose a hospital had the following fixed and variable costs for its operating room $($OR$)$:

Variable costs per operation Fixed costs per year

Personnel $$150$ Depreciation $$100,000$

Supplies $20$ Administration $120,000$

Laundry $30$ Other $80,000$

Other $50$

Total $$250$ Total $$300,000$

a$.$ Complete the following chart:

Costs

Volume Fixed Variable Total Average

$500$

$1500$

$2500$

$3000$

b$.$ Suppose a managed care organization $($MCO$)$ offers to generate $500$ operations a year but offers to pay only $$300$ per operation. Should we agree to this arrangement? We currently perform $2500$ operations per year and have the capacity to easily handle $3000$ per year.

$(1)$ What is the cost per operation at $2500$ per year? Cost per operation $=$ total annual cost$/$total number of operations $=300,$

$(2)$ What is the cost per operation at $3000$ per year?

$(3)$ What is your decision?

c$.$ Does this incremental impact concern only MCO negotiations, or does it have wider implications?