“I don’t understand this cost report at all,” exclaimed Jeff Mahoney, the newly appointed administrator of Mountainview General Hospital. “Our administrative costs in the new pediatrics clinic are all over the map. One month the report shows $8,300, and the next month it’s $16,100. What’s going on?” Mahoney’s question was posed to Maria McDonough, the hospital’s director of Cost Management. “The main problem is that the clinic has experienced some widely varying patient loads in its first year of operation. There seems to be some confusion in the public’s mind about what services we offer in the clinic. When do they come to the clinic? When do they go to the emergency room? That sort of thing. As the patient load has varied, we’ve frequently changed our clinic administrative staffing.”
Mahoney continued to puzzle over the report. “Could you pull some data together, Megan, so we can see how this cost behaves over a range of patient loads?” “You’ll have it this afternoon,” McDonough responded. Later that morning, the following data were collected:

McDonough does not believe the first year’s widely fluctuating patient load will be experienced again in the future. McDonough has estimated that the clinic’s relevant range of monthly activity in the future will be 600 to 1,200 patients.

Required:
1. Draw a scatter diagram of the clinic’s administrative costs during its first year of operation.
2. Visually fit a curvilinear cost line to the plotted data.
3. Mark the clinic’s relevant range of activity on the scatter diagram.
4. Visually fit a semivariable-cost line to approximate the curvilinear cost behavior pattern within the clinic’s relevant range.
5. Estimate the fixed- and variable-cost components of the visually fit semivariable-cost line.

6. Use an equation to express the semi variable-cost approximation of the clinic’s administrative costs.
7. What is your prediction of the clinic’s administrative cost during a month when 800 patients visit the clinic? When 300 patients visit? Which one of your visually fit cost lines did you use to make each of these predictions? Why?

Transcribed Image Text:

Month January February. March April May June July August September October November December Patient Load 1,400 500. 400 1,000 1,300 900 1,100 300. 700 1,200 600 1,500 Administrative Cost $13,900 7,000 6,000 10,000 11,900 9,200 10,200 4,100 9,400 11,100 8,300 16,100