St. Luke’s Medical Center (SLMC) offers a number of specialized medical services, including neuroscience, cardiology, and oncology. SLMC’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 for 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 2,100 patient 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. Lynley Jackson, the administrator of the orthopedic center, has estimated that the center will average 2,000 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 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 Pharmacy Laboratory $ 15,000 2,000 217,300 $ 15,000 2,000 232,300 55,700 58,700 Depreciation 12,000 12,000 Laundry 16,800 18,000 Administration 17,000 17,000 Lease (equipment) 30,000 30,000