Question :

We Care is an outpatient surgical clinic that was profitable for many years, but Medicare has cut its reimbursements by as much as 50 percent. As a result, the clinic wants to better understand its costs. It decides to prepare an activity-based cost analysis, adding an estimate of the average cost of both general surgery and orthopedic surgery. The clinic's three cost centers and their cost drivers as given.

Cost Center Cost Cost Driver Driver Quantity

Professional salaries $1,500,000 Professional hours 10,000

Patient services and supplies 25,000 Number of patients 500

Building cost 150,000 Square feet 1,500

The two main surgical units and their related data follow.

Service Hours Square Feet* Patients

General surgery 2,500 500 400

Orthopedic surgery 7,500 1,000 100

Required:

1. Evaluate the cost per cost driver for each of the three cost centers.

2. Use the results from part 1 to allocate costs from each of the three cost centers to both the general surgery and the orthopedic surgery units. Evaluate total cost and average cost per patient for both the general surgery and the orthopedic surgery units.