Question

St. Mark’s Hospital contains 520 beds. The occupancy rate varies between 60% and 90% per month, but the average occupancy rate is generally 80%. In other words, on average, 80% of the hospital’s beds are occupied by patients. At this level of occupancy, the hospital’s operating costs are $39 per occupied bed per day, assuming a 30-day month. This $39 figure contains both variable and fixed cost elements. This average cost figure drops to $36 when the occupancy rate is 90% (typically during the months of July and August).

During June, the hospital’s occupancy rate was only 60% and a total of $467,120 in operating costs was incurred during the month.

Required:

1-a. Using the high-low method, estimate the variable cost per occupied bed on a daily basis. (Round your answer to 3 decimal places.)

Variable cost: (per bed-day)

1-b. Using the high-low method, estimate the total fixed operating costs per month. (Do not round intermediate calculations.)

Total fixed operating costs: (per month)

2. Assume an occupancy rate of 70% per month. What amount of total operating cost would you expect the hospital to incur? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

Total expected costs:

Answer 1

Difference in cost: a. 1.

Monthly operating costs at 80% occupancy:520 beds × 80% = 416beds;416 beds × 30 days × $39 per bed-day	$486,720
Monthly operating costs at 60% occupancy (given)	467,120
Difference in cost	19,600 $

Difference in activity:
80% occupancy (520 beds × 80% × 30 days)	12480
60% occupancy (520 beds × 60% × 30 days)	9360
Difference in activity	3,120

Change in cost/change in activity = 19600/3120 = 6.28 = 6.3 per bed

 b. 

Monthly operating costs at 80% occupancy (above)	$486,720
Less variable costs:416 beds × 30 days × $6.3per bed-day	78,624
Fixed operating costs per month	$408,096

 2.

520 beds × 70% = 364 beds occupied:
Fixed costs	$408,096
Variable costs: 364 beds × 30 days × $6.3 per bed-day	68,796
Total expected costs	$476,892