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 4,200 patient days of activity. During February, the activity was 4,600 patient days. Costs for these two levels of activity output are as follows:

	4,200 Patient Days		4,600 Patient Days
Salaries, nurses		$52,200		$52,200
Aides		32,600		32,600
Pharmacy		246,500		268,100
Laboratory		107,600		115,600
Depreciation		22,900		22,900
Laundry		207,480		227,240
Administration		27,400		27,400
Lease (equipment)		33,300		33,300

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	FixedMixedVariable
Aides	FixedMixedVariable
Pharmacy	FixedMixedVariable
Laboratory	FixedMixedVariable
Depreciation	FixedMixedVariable
Laundry	FixedMixedVariable
Administration	FixedMixedVariable
Lease (equipment)	FixedMixedVariable

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 4,300 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.

$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 4,800 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:

the fixed cost per patient day is reducedthe total fixed costs have changedthe variable cost per patient day decreases