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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'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 4,100 patient days of activity. During February, the activity was 4,500 patient days. Costs for these two levels of activity output are as follows: 4,100 Patient Days 4,500 Patient Days Salaries, nurses $56,800 $56,800 Aides 34,400 34,400 Pharmacy 215,000 234,200 Laboratory 94,800 102,000 Depreciation 23,000 23,000 Laundry 207,050 227,250 Administration 29,100 29,100 Lease (equipment) 34,400 34,400 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 per patient day per patient day Fixed 3. The administrator of the orthopedic center estimated that the center will average 4,300 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. Charge per patient day How much of this charge is variable? Variable charge per patient day How much of the charge per patient day is fixed? ? Fixed charge per patient day 4. Suppose the orthopedic center averages 4,700 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. per patient day High-Low Method to Determine Fixed Cost and Variable Rate McGarvey Manufacturing Company had the following 12 months of data on purchasing cost and number of purchase orders. Number of Purchase Month Purchasing Cost Orders $19,250 January 370 February 18,040 320 March 18,200 340 April 18,050 410 May 19,345 400 June 19,500 450 July 19,670 460 August 21,400 600 September 19,430 440 October 20,020 570 18,800 470 480 November December 19,340 Required: 1. Determine the high point and the low point. Month with high number of purchase orders August Month with low number of purchase orders February 2. Calculate the variable rate for purchasing cost based on the number of purchase orders. (Round to the nearest cent.) per purchase order $ 3. Calculate the fixed monthly cost of purchasing. 4. Write the cost formula for the purchasing activity showing the fixed cost and the variable rate. Round variable rate to the nearest cent. Total purchasing cost + (s * Purchase orders 5. If McGarvey Manufacturing Company estimates that next month will have 420 purchase orders, what is the total estimated purchasing cost for that month? = 6. What if McGarvey Manufacturing wants to estimate purchasing cost for the coming year and expects 5,330 purchase orders? What will estimated total purchasing cost be? What is the total fixed purchasing cost
