Cost Behavior, High$-$Low Method, Pricing Decision

St$.$ Teresa's Medical Center $($STMC$)$ offers a number of specialized medical services, including neuroscience, cardiology, and oncology. STMC$\text{'}$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 from 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 $4,300$ patient days of activity. During February, the activity was $4,800$ patient days. Costs for these two levels of activity output are as follows:

$4,300$ Patient Days $4,800$ Patient Days

Salaries, nurses $$57,600$ $$57,600$

Aides $30,50030,500$

Pharmacy $251,100278,100$

Laboratory $113,100123,600$

Depreciation $22,60022,600$

Laundry $192,210214,560$

Administration $28,60028,600$

Lease $($equipment$)35,30035,300$

Required:

$1.$ Classify each cost as fixed, variable, or mixed, using patient days as the activity driver. Assume that the Pharmacy & Laboratory are $$in house$$ and that the Laundry is $$shipped out$$ to a third party vendor.

Salaries, nurses

Aides

Pharmacy

Laboratory

Depreciation

Laundry

Administration

Lease $($equipment$)$

$2.$ Use the high$-$low method to separate the mixed costs into fixed and variable.

Laboratory: Pharmacy:

Variable $fill in the blank $9$ per patient day $fill in the blank $10$ per patient day

Fixed $fill in the blank $11$ $fill in the blank $12$

$3.$ The administrator of the orthopedic center estimated that the center will average $4,500$ patient days per month. If the center is to be operated as a nonprofit organization, determine the amount it will need to charge per patient day? Round your interim calculations and final answers to the nearest cent.

$fill in the blank $13$ Charge per patient day

How much of this charge is variable?

$fill in the blank $14$ Variable charge per patient day

How much of the charge per patient day is fixed?

$fill in the blank $15$ Fixed charge per patient day

$4.$ Suppose the orthopedic center averages $5,200$ patient days per month. How much would need to be charged per patient day for the center to cover its costs? Round your answer to the nearest cent.

$fill in the blank $16$ per patient day

The main reason why the charge per patient day decreased as the activity output increased is because: