Danish Hospital recently installed a RAP Scanner which is a
Danish Hospital recently installed a RAP Scanner, which is a diagnostic tool used both in suspected cancer cases and for detecting certain birth defects while the fetus is still in the womb. The scanner is leased for $5,000 per month, and a full-time operator is paid $3,000 per month. Data concerning use of the scanner for a typical month follow.

The direct costs consist primarily of supplies that are consumed in the scanning process. Currently, less than 20% of the machine’s capacity is used.

The following questions will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so.
A. If the lease cost and the operator salary are allocated on the basis of minutes on the scanner, what is the total cost of a cancer scan?
B. Suppose the cancer scans are experimental. Rather than charging $600 per scan, the hospital costs are reimbursed under a National Institutes of Health (NIH) contract. The NIH will reimburse direct costs as well as an allocated share of the lease cost and operator’s salary. As an allocation base, the NIH allows either the number of scans or total minutes on the machine. What is the maximum reimbursable cost per cancer scan?
C. The hospital is bidding on a state contract to supply birth defect scans to indigent pregnant women. The hospital would provide up to 14 scans a month for a fixed fee per scan. Assuming the hospital does not want to lose money on this contract, what is the minimum acceptable fee? Explain how you decided which costs are relevant.
D. Identify uncertainties about which costs should be included in bidding for the contract described in part (C).
E. Discuss the pros and cons of using total allocated costs, including administrative overhead, in bidding for the contract described in part (C).

Suppose the hospital is bidding on the contract described in part (C). You have been asked to prepare a report of the hospital’s expected costs for the contract. Turn in your answer to the following.
F. Write a memo to the chief accountant recommending the costs you think should be included in the expected costs. Attach to the memo a schedule showing your computations. As appropriate, refer to the schedule in the memo. Support cost allocation uncertainties and fairness AndyRic
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