Question

Cost Behavior, High-Low Method, Pricing Decision St. Teresa's Medical Center (STMC) offers a number of specialized medical services, including neuroscience, cardiology, and oncology. STMC's strong reputation for quality medical care allowed it to branch out into other services. It is now ready to expand its orthopedic services and has just added a free-standing orthopedic clinic offering a full range of outpatient, surgical, and physical therapy services. The cost of the orthopedic facility is depreciated on a straight-line basis. All equipment within the facility is leased. Since the clinic had no experience with in-patient orthopedic services (for patients recovering from hip and knee replacements, for example), it decided to operate the orthopedic center for two months before determining how much to charge per patient day on an ongoing basis. As a temporary measure, the clinic adopted a patient-day charge of $190, an amount equal to the fees charged by a hospital specializing in orthopedic care in a nearby city. This initial per-day charge was quoted to patients entering the orthopedic center during the first two months with assurances that if the actual operating costs of the new center justified it, the charge could be less. In no case would the charges be more. A temporary policy of billing after 60 days was adopted so that any adjustments could be made. The orthopedic center opened on January 1. During January, the center had 4,000 patient days of activity. During February, the activity was 4,500 patient days. Costs for these two levels of activity output are as follows: 4,000 Patient Days 4,500 Patient Days Salaries, nurses $ 58,800 $ 58,800 Aides 33,600 33,600 Pharmacy 211,300 235,300 Laboratory 131,300 144,800 Depreciation 23,300 23,300 Laundry 184,000 207,000 Administration 29,800 29,800 Lease (equipment) 39,500 39,500 Required: 1. Classify each cost as fixed, variable, or mixed, using patient days as the activity driver. Assume that the Pharmacy & Laboratory are “in house” and that the Laundry is “shipped out” to a third party vendor. Salaries, nurses Fixed Aides Fixed Pharmacy Mixed Laboratory Mixed Depreciation Fixed Laundry Variable Administration Fixed Lease (equipment) Fixed 2. Use the high-low method to separate the mixed costs into fixed and variable. Laboratory: Pharmacy: Variable $ per patient day $ per patient day Fixed $ $ 3. The administrator of the orthopedic center estimated that the center will average 4,200 patient days per month. If the center is to be operated as a nonprofit organization, determine the amount it will need to charge per patient day? Round your interim calculations and final answers to the nearest cent. $ Charge per patient day How much of this charge is variable? $ Variable charge per patient day How much of the charge per patient day is fixed? $ Fixed charge per patient day 4. Suppose the orthopedic center averages 4,700 patient days per month. How much would need to be charged per patient day for the center to cover its costs? Round your answer to the nearest cent. $ per patient day The main reason why the charge per patient day decreased as the activity output increased is because:

Answer 1

	January		February
Activity - Patient days	4000		4500		Fixed / Variable
Salaries	Cost	Perday	Cost	Perday
Nurses	58800	14.70	58800	13.07	Fixed
Aides	33600	8.40	33600	7.47	Fixed
Pharmacy	211300	52.83	235300	52.29	Mixed
Laboratory	131300	32.83	144800	32.18	Mixed
Depreciation	23300	5.83	23300	5.18	Fixed
Laundry	184000	46.00	207000	46.00	Variable
Administration	29800	7.45	29800	6.62	Fixed
Lease Equipent	39500	9.88	39500	8.78	Fixed
a. The expenses which remain the same for both the activity levels are fixed.
b. The expenses for which , per day cost is fixed are fully variable.
c. Alll the other expenses are mixed.

2.

Fixed cost per month (B - F)		19300	23300
Variable cost per day	E	48.00	27.00

Working:

		Pharmacy	Laboratory
High	A	235300	144800
Low	B	211300	131300
Difference (A - B)	C	24000	13500
Difference in days	D	500	500
(4,500 - 4,000)
Per day difference (C/D)	E	48.00	27.00
Variable cost per day	E	48	27
Total variable cost (for 4,000	F	192000	108000
patient days)   (E x 4,000)
Total cost for 4,000 days	B	211300	131300

3.

Charge per patient day

735,800 / 4,200

175.19

Working:

Activity - Patient days	4200
	Variable		Fixed	Total
	Per day	Total
Nurses	-	0	58800	58800
Aides	-	0	33600	33600
Pharmacy	48.00	201600	19300	220900
Laboratory	27.00	113400	23300	136700
Depreciation		0	23300	23300
Laundry	46.00	193200	0	193200
Administration		0	29800	29800
Lease Equipent		0	39500	39500
Total Cost		508200	227600	735800

4.

Charge per patient day

796,300 / 4,700

169.43

Working:

Activity - Patient days	4700
	Variable		Fixed	Total
	Per day	Total
Nurses	-	0	58800	58800
Aides	-	0	33600	33600
Pharmacy	48.00	225600	19300	244900
Laboratory	27.00	126900	23300	150200
Depreciation		0	23300	23300
Laundry	46.00	216200	0	216200
Administration		0	29800	29800
Lease Equipent		0	39500	39500
Total Cost		568700	227600	796300

The main reason why the charge per patient day has decreased , is due to the fixed costs being spread over a higher number of patient days.