Explain answers and how we calculate.

2) Cost concerns at Orthopedic Solutions Orthopedic Solutions is a full-service clinic for children with hip problems. There are two main types of patients, the luxation patients (L) and the dysplasia patients (D). The L- patients need more intensive monitoring. They visit the hospital three times a month. Alternatively D-patients are treated at home (once a month) via easier techniques that use standard supplies. This treatment is monitored by staff-visits of Orthopedic Solutions Inc.'. The following information is available with regard to these treatments. Treatments Direct Costs (supplies) General overhead TOTAL 12000 $ 860000 $ 1170000 L 8000 $ 550000 D 4000 $ 310000 ? ? Currently there is a discussion going on about cost allocation. Using the number of treatments as allocation base is one option that most hospitals tend to use. Some hospitals use the direct cost base as an allocation base for overhead. Nevertheless, the alternative is a more detailed analysis of overhead: The general overhead for these treatments consists of two activities namely 1) nursing services (with skilled A-level and lower skilled B-level staff) and 2) specialized machine activity. Full-time equivalents and the percentage of machine usage are potential allocation bases. The following data is available for analysis: Nursing: $ 810000 (wage costs: $ 600000 for A-level staff and $ 210000 for B-level staff) Staff required for L 5 A-level persons (full 1 B-level person (full time) treatment: time) Staff required for D No A-Level staff 2 B-level persons (one of which is treatment: necessary employed for 50%, the other full time) Specialized machining: Remaining part of overhead => depreciation on orthopedic equipment Only 5% of all equipment is used for D, the rest is used for L. Required: 1. Calculate the cost per treatment for L and D using a) the number of treatments as the allocation basis. b) the direct costs incurred as the allocation basis. 2. Calculate the cost per treatment for L and D using the detailed information on overheads. Use full time equivalents as allocation base for nursing services and percentage estimates of orthopedic equipment usage for specialized machining. 3. Comment on your solution and interpret. Include a memo on why the cost per treatment differs under the methods in 1) and 2). Relate it to the different costing approaches for product costing discussed in the lecture. Which allocation basis do you prefer? Explain