St. John's Medical Center (SJMC) has fi ve medical technicians who areresponsible for conducting cardiac catheterization testing in SJMC's Cath Lab.Each technician is paid a salary of $36,000 and is capable of conducting1,000 procedures per year. The cardiac catheterization equipment is one yearold and was purchased for $250,000. It is expected to last fi ve years. Theequipment's capacity is 25,000 procedures over its life. Depreciation iscomputed on a straight-line basis, with no salvage value expected. Thereading of the catheterization results is conducted by an outside physicianwhose fee is $120 per test. The technician's report with the outsidephysician's note of results is sent to the referring physician. In addition to thesalaries and equipment, SJMC spends $50,000 for supplies and other costs needed to operate the equipment (assuming 5,000 procedures areconducted). When SJMC purchased the equipment, it fully expected toperform 5,000 procedures per year. In fact, during its fi rst year of operation,5,000 procedures were run. However, a larger hospital has established a clinicin the city and will siphon off some of SJMC's business. During the comingyears, SJMC expects to run only 4,200 cath procedures yearly. SJMC hasbeen charging $850 for the procedureenough to cover the direct costs ofthe procedure plus an assignment of general overhead (e.g., depreciation onthe hospital building, lighting and heating, and janitorial services). At the beginning of the second year, an HMO from a neighboring communityapproached SJMC and offered to send its clients to SJMC for cardiaccatheterization provided that the charge per procedure would be $550. The HMO estimates that it can provide about 500 patients per year. The HMO hasindicated that the arrangement is temporaryfor one year only. The HMOexpects to have its own testing capabilities within one year.

Required: 1. Classify the resources associated with the cardiac catheterization activity intoone of the following: (1) committed resources, or (2) fl exible resources. 2. Calculate the activity rate for the cardiac catheterization activity. Break theactivity rate into fi xed and variable components. Now, classify each activityresource as relevant or irrelevant with respect to the following alternatives: (1)accept the HMO offer, or (2) reject the HMO offer. Explain your reasoning. 3. Assume that SJMC will accept the HMO offer if it reduces the hospital'soperating costs. Should the HMO offer be accepted? 4. Jerold Bosserman, SJMC's hospital controller, argued against accepting theHMO's offer. Instead, he argued that the hospital should be increasing thecharge per procedure rather than accepting business that doesn't even coverfull costs. He also was concerned about local physician reaction if word gotout that the HMO was receiving procedures for $550. Discuss the merits ofJerold's position. Include in your discussion an assessment of the priceincrease that would be needed if the objective is to maintain total revenuesfrom cardiac catheterizations experienced in the fi rst year of operation. 5. Chandra Denton, SJMC's administrator, has been informed that one of theCath Lab technicians is leaving for an opportunity at a larger hospital. She metwith the other technicians, and they agreed to increase their hours to pick upthe slack so that SJMC won't need to hire another technician. By working acouple hours extra every week, each remaining technician can perform 1,050procedures per year. They agreed to do this for an increase in salary of$2,000 per year. How does this outcome affect the analysis of the HMO offer? 6. Assuming that SJMC wants to bring in the same revenues earned in thecardiac catheterization activity's fi rst year less the reduction in resource spending attributable to using only four technicians, how much must SJMCcharge for a procedure?