Question

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	$	58,000	$	58,000
Aides		34,600		34,600
Pharmacy		217,600		237,200
Laboratory		98,400		105,600
Depreciation		26,800		26,800
Laundry		184,090		202,050
Administration		27,700		27,700
Lease (equipment)		36,100		36,100

Required

The administrator of the orthopedic center estimated that the center will average 4,200 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

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

Answer 1

St. Teresa's Medical Center $ $ Fixed 16,700 24,600 Variable $ 2,05,800 $ 75,600 Fixed $ 16,700 $ 24,600 Variable $ 2,30,300 $ 84,600 4200 Patient Days Salaries, nurses $ 58,000.00 Aides $ 34,600.00 Pharmacy $ 2,22,500.00 Laboratory $ 1,00,200.00 Depreciation $ 26,800.00 Laundry $ 1,88,580.00 Administration $ 27,700.00 Lease (equipment) $ 36,100.00 Total Costs $ 6,94,480.00 Cost Per Patient $ 165.35 Salaries, nurses Aides Pharmacy Laboratory Depreciation Laundry Administration Lease (equipment) Total Costs Cost Per Patient 4700 Patient Days $ 58,000.00 $ 34,600.00 $ 2,47,000.00 $ 1,09,200.00 $ 26,800.00 $ 1,88,580.00 $ 27,700.00 $ 36,100.00 $7,27,980.00 $ 154.89 $44.9*4200 $44.9* 4700 Total Fixed Costs $ 2,24,500.00 Total Variable costs $4,69,980.00 Total Costs $ 6,94,480.00 Cost Per Patient $ 53.45 $111.90 $ 165.35 Total Fixed Costs $2,24,500.00 Total Variable Costs $5,03,480.00 Total Costs $ 7,27,980.00 Cost Per Patient $ 47.77 $ 107.12 $154.89 To operate as a non-profit, the company should charge the following amount $165.35 per patient. The amount of $53.45 is fixed while $111.90 is variable. To operate as a non-profit, the company should charge the following amount $154.89 per patient. The amount of $47.77 is fixed while $107.12 is variable. (237200 - 217600) / 4500 - 4100) = 49 x 4500 = 220500 - 237200 = 16700 (105600 - 98400)/(4500 - 4100 ) = 18 x 4500 = 81000 - 105600 = 24600 202050 - 184090 = 17960 / 400 = 44.9 (237200 - 217600 ) / ( 4500 - 4100 ) = 49 x 4500 = 220500 - 237200 = 16700 (105600 - 98400 ) / ( 4500 - 4100) = 18 x 4500 = 81000 - 105600 = 24600 202050 - 184090 = 17960 / 400 = 44.9