Monson Medical Clinic offers a number of specialized medical services, one of which is can¬

cer care. Because of the reputation the clinic's oncologists have developed over the years, demand for these services is strong. As a result, Monson recently added a 100-bed cancer wing to the clinic. The cost of the cancer facility is depreciated on a straight-line basis. All equipment within the facility is leased.

Since the clinic had no experience with in-patient cancer services, it decided to operate the cancer care 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 $100, an amount equal to the fees charged by a hospital specializing in cancer care in a nearby city.

This initial per-day charge was quoted to patients entering the cancer care 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 tem¬

porary policy of billing after sixty days was adopted so that any adjustments could be made.

The cancer care center opened on January 1. During January, the center had 2,100 pa¬

tient days of activity. During February, the activity was 2,250 patient days. Costs for these two levels of activity output are as follows:

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. Karl Johnson, the administrator of the cancer center, has estimated that the center will average 2,000 patient days per month. If the center is to be operated as a nonprofit or¬
ganization, how much will it need to charge per patient day? How much of this charge is variable? How much is fixed?
4. Suppose the cancer center averages 2,500 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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2,100 Patient Days 2,250 Patient Days Salaries, nurses Aides Laboratory Pharmacy $ 6,000 1,200 $ 6,000 1,200 110,000 117,500 31,000 32,500 Depreciation 11,800 11,800 Laundry 16,800 18,000 Administration 12,000 12,000 Lease (equipment) 30,000 30,000