The Elder Clinic, a not-for-profit entity, provides limited medical services to low-income elderly patients. The manager’s summary report for the past four months of operations is reproduced here.

The clinic receives an operating subsidy from the city, but unfortunately, the operating loss that has been incurred through June $(79 392) is larger than anticipated. Part of the problem is the salary increase that went into effect in June, which had been overlooked when the budget was submitted to the city last year. To compound the problem, the cold winter months traditionally bring with them an increase in cold-related health problems. Thus, the clinic is likely to experience an increase in patient visits during July.
The clinic’s managers are considering an increase in patient fees to reduce losses. However, they are reluctant to raise fees because the patients have low incomes. They will raise fees only if it is necessary.

Required
(a) Use your judgement to classify costs as fixed, variable or mixed. Explain how you classified each item.
(b) Create a cost function for the Elder Clinic. Use the high-low method to estimate the function for any mixed costs.
(c) Use the cost function to estimate July expenses based on a projection of 940 patient visits.

(d) List reasons why management of the Elder Clinic cannot know with certainty what the expenses will be during July. List as many reasons as you can.
(e) Describe the pros and cons of using your cost estimate from part (c) to decide whether to raise patient fees.
(f) The managers need your July cost estimate to help them decide whether to raise patient fees.
Use the information you learned from parts (a) to (e) to write a memo to the director of the Elder Clinic presenting your estimate of July costs. Provide the director with appropriate information for understanding your methodology and evaluating the reliability of your cost estimate.

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March April May June Total Number of patient visits 849 821 778 842 3290 Patient fees $ 4230 $ 4 180 $ 3875 $ 4260 $ 16545 Medical staff salaries 13 254 13 256 13 254 14115 53 879 Medical supplies used 3182 3077 2 934 3175 12 368 Administrative salaries 3 197 3 198 3 197 3412 13 004 1 000 Rent Utilities 1000 1 000 1100 4 100 532 2 854 378 321 226 1457 Other expenses Total expenses 2776 2671 2 828 11 129 24 019 23 685 23 377 24 856 95 937 Operating surplus (loss) $(19789) $(19 505) $(19502) $(20 596) $(79 392)