QUESTION 6 The Looney Tunes Hospital ("LTH") provides medical treatment to patients under two broad categories - Normal and Emergency. Billings (sales) information for each category of patients are as follows: Total billings (sales) Category Normal treatment Emergency treatment $10,000,000 $12,000,000 Mark-up on Cost of Sales 25% 50% The management of LTH is currently using a simple system of allocating indirect costs based on number of cases processed. Lately, the management is increasingly concerned with rising costs involved in serving its patients. As a result, a study was conducted to analyse the billings and costs for each category of patients. An activity analysis of the indirect costs identified the following: Use of cost driver Estimated Activity cost Cost driver Normal Emergency Total indirect pool treatment treatment usage cost ($) Medication No. of prescriptions 18,000 6,000 24,000 480,000 Cases processing No. of cases 12,500 2,500 15,000 360,000 Surgery No. of operations 200 1,800 2,000 3,600,000 4,440,000 Required: a) Calculate the gross profit and gross profit margin for each category of patients. (Round the gross profit margins to the nearest %) (3 marks) b) Using the current method, calculate the indirect cost rate and allocate it to each category of patients. (1% marks) c) For each activity cost pool, calculate the activity cost rate. (1% marks) d) Assign the activity cost rates to each category of patients. (3 marks) e) Under the current system, calculate the total (full) cost, the net profit (or loss) and net profit (or loss) margin for each category of patients. (Round the net profit (loss) margins to the nearest %.) (3 marks) Page 12 of 13 f) Under the Activity-Based Costing (ABC) system, calculate the total (full) cost, the net profit (or loss) and net profit (or loss) margin for each category of patients. (Round the net profit (loss) margins to the nearest %.) (3 marks) g) Discuss any differences in the results of parts (e) and (f). Should any changes be made to LTH's pricing strategy? Why or why not? (Maximum 180 words) (4 marks) [Total: 19 marks]