Question

Problem 2-22 High-Low and Scattergraph Analysis [LO2-4, L02-5] Pleasant View Hospital of British Columbia has just hired a new chief administrator who is anxious to employ sound management and planning techniques in the business affairs of the hospital. Accordingly, she has directed her assistant to summarize the cost structure of the various departments so that data will be available for planning purposes. The assistant is unsure how to classify the utilities costs in the Radiology Department because these costs do not exhibit either strictly variable or fixed cost behavior. Utilitie:s costs are very high in the department due to a CAT scanner that draws a large amount of power and is kept running at all times. The scanner can't be turned off due to the long warm-up period required for its use. When the scanner is used to scan a patient, it consumes an additional burst of power. The assistant has accumulated the following data on utilities costs and use of the scanner since the first of the year. Number of Utilities Month January February March April Scans 180 170 160 170 290 280 140 130 120 110 Cost $6,000 $5,000 $4,900 $5,500 $8,200 $7,800 $6,200 $5,400 $5,600 $4,600 June July August September October The chief administrator has informed her assistant that the utilities cost is probably a mixed cost that will have to be broken down into its variable and fixed cost elements by use of a scattergraph. The assistant feels, however, that if an analysis of this type is necessary, then the high-low method should be used, since it is easier and quicker. The controller has suggested that there may be a better approach.

Answer 1

		Number of Scans	Utilities Cost
	High Level of Activity	290	8200
	Low Level of Activity	110	4600
	Change	180	3600
	Variable Cost Element	20	Per Scan
		3600/180
	Fixed Cost Element	8200-(20*290)
		2,400
Y=	2400+	20X