Monson Medical Clinic offers a number of specialized medical services, one of which is cancer care. Because of the reputation the clinic’s physicians (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 inpatient 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 charges made by a hospital specializing in cancer care in a nearby city. This initial per-day charge was quoted to patients entering the cancer-care cen- ter 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 adjustments could be made if necessary.

The cancer-care 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 usage are as follows:

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Salaries, nurses Aides Laboratory Pharmacy 2,100 Patient Days $ 6,000 1,200 Depreciation Laundry Administration Lease (equipment) Required: 2,250 Patient Days $ 6,000 1,200 117,500 110,000 31,000 32,500 11,800 11,800 16,800 18,000 12,000 12,000 30,000 30,000 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 their fixed and vari- able components. 3. Karl Johnson, the administrator of the cancer center, has estimated that the cen- ter 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 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 per-patient-day charge decreased as the activity output increased.