Question 3 Cherry-Pick Operations (CPO) is a hospital that was set up by the Government to provide additional capacity to help meet the growing demand for operations that could not be met by the country's Public Health Service (PHS) hospitals. PHS hospitals pay for CPO to perform operations when they believe that they are in danger of exceeding the Government's waiting time targets. The prices charged by CPO are set by a Government regulator, and they are regularly inspected to ensure that high quality care is provided. CPO specialises in just three operations: knee replacements (K), hip replacements (H) and cataract surgery (C). Each operation has three stages: 1. Preparation checks and anaesthetic administered by an anaesthetist 2. Procedure performed by a surgeon supported by a medical team 3. Recovery - post-operation observation supervised by a nurse The time required by each type of operation at each stage is shown below: (Hours per operation) Preparation Procedure Recovery K H 0.6 0.5 0.2 2.0 1.5 0.3 0.9 1.2 0.8 The annual capacity of each stage is shown below: Preparation Procedure Recovery 4,200 hours (determined by the availability of anaesthetists) 8,000 hours (determined by the availability of surgeons) 7,650 hours (determined by the capacity of the recovery room) CPO is operational from Monday to Friday and uses premises that are only equipped to perform these three procedures. This means that once patients leave the recovery stage they are transferred to a PHS hospital for any further care that is required. Budgeted information for the three operations for next year is as follows: (Per operation) K H C Selling price 11,200 12,600 2,700 Direct material cost 4,900 4,500 800 Direct labour cost 620 500 140 Variable overhead cost 160 130 40 Fixed overhead cost 1,090 880 250 Total demand (operations) 1,500 1,750 6,500 Although CPO's revenue is all generated from sales to PHS hospitals, and it is Government owned, it is run as a stand-alone entity with its own management team and it is currently assessed on a number of performance measures including absorption costing profit.