Question

There is not a case study involved with this question. This is my second attempt to have this question answered.

This question is in reference to the healthcare industry.

Briefly describe what happens to each of the following as volume increases. Assume all values stay within their relevant range. Total fixed cost? Total variable cost? Fixed cost per unit? Variable cost per unit? Explain the relationship between step-fixed costs and the relevant range. References would be a bonus! This question is found on page 448 in Financial Management of Heath Care Organizations (Zelman, et al., 2014).

Answer 1

Volume means quantity here, like number of patients. If it increases, the corresponding effects are as below:

Total fixed cost: This is the periodic cost, which is unaffected with the volume change. The total fixed cost will remain the same.

Example of it is “rent of hospital building”, “salaries of administrative staff”, etc. At the increase in number of patients, these cots do not increase.

Total variable cost: This is the multiplication of per-unit cost and the number units. This would be increased if volume increases.

Example of it is “doctors’ fee”. Doctors used to take fee per patient; therefore, if the number of patients increases, such fee would increase.

Fixed cost per unit: This is the total fixed cost by dividing the number of units. Since the total fixed cost remains fixed all the time, increasing the number of units (volume) should decrease the fixed cost per unit.

Example: If the rent of hospital building is taken, increasing the number of patients can decrease the rent per patient.

Variable cost per unit: This is the total variable cost by dividing the number of units. This is the cost per unit which remains the same always.

Example: Doctors’ fee per patient is fixed. This is not increasing or decreasing by the increasing number of patients.