*Problem 7-24 Lancaster Orthopedics specializes in hip, knee, and shoulder replacement surgery. In addition to the actual surgery, the company 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 treatment 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 ina rate costs and profitability or the oint replacement procedures. As a result Bree Lancaster, the company'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 $8,000 $10,000 6, Knee Shoulder $6,000 400 2.0 hourS 1.2 hours 1.5 hours Fee charged to patient Number of procedures per year Average time per procedure Number of procedures per operating room session Inpatient days per procedure Surgeon's fee per procedure Medical supplies per procedure 600 800 $1,200 $400 $1,500 $300 $1,800 $200 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 proposed cost drivers, are presented below. Activity Operating room preparation Number of sessions Operating room use Nursing and ancllary services Inpatient days Administration Cost Driver Total Cost $864,000 1,449,000 5,415,000 1,216,000 Number of procedures936,000 $9,880,000 Procedure time Sales revenue