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Assignment 3 AML

The document discusses using the high-low method to determine fixed and variable costs for an orthopedic clinic. It provides cost data for two months of operation at different activity levels and asks to classify costs, separate mixed costs, and calculate a breakeven charge per patient day under two scenarios of average monthly patient days.

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142 views2 pages

Assignment 3 AML

The document discusses using the high-low method to determine fixed and variable costs for an orthopedic clinic. It provides cost data for two months of operation at different activity levels and asks to classify costs, separate mixed costs, and calculate a breakeven charge per patient day under two scenarios of average monthly patient days.

Uploaded by

Yohannabregiba
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Exercise 3

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 fortwo
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 4,200 patient

days of activity. During February, the activity was 4,500 patient days. Costs for these two levels of
activity output are as follows:

4200 Patient 4,500 Patient


Days Days
Salaries, nurses $ 55,000 $ 55,000
Aides 32,000 32,000
Pharmacy 235,700 251,300
Laboratory 120,300 127,200
Depreciation 25,000 25,000
Laundry 20,160 21,600
Administration 27,000 27,000
Lease (equipment) 36,000 36,000

Required:

1. Classify each cost as fixed, variable, or mixed, using patient days as the activity driver.
2. Use the high-low method to separate the mixed costs into fixed and variable.

3. The administrator of the orthopedic center estimated that the center will average 4,300

patient days per month. If the center is to be operated as a nonprofit organization, how

much will it need to charge per patient day? How much of this charge is variable? How

much is fixed?

4. Suppose the orthopedic center averages 4,800 patient days per month. How much would

need to be charged per patient day for the center to cover its costs? Explain why the charge

per patient day decreased as the activity output increased.

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