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:

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)

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

	Laboratory:	Pharmacy:
Variable	$ per patient day	$ per patient day
Fixed	$	$

Answer 1

Bossen Clawfication of Each cost as Fixed Voyjable of mixed Expense Type of Explanation Gost Pharmacy Salaries. Nunes. Eixed Fixed 1 mixed laborating | Mixed Depreciation fixed Laundry Vertiable Alminlahating Fixed repose (Guipment) | Fired_ | Pengins fixed as does not deprod_osprobe Pemaid_fixel_95_lees not depend o9 patient It is mixed cost It is mixed cosla- Repair Fixet as wear and tear of as jet. Remain Vaviable q5 depends on patients Remzia Fixel as depends on net pahint. Remain_fixed as not depends on palink High and low method to separate the mixed costs into fired and Variable High_491 low Method_is_Method where different of two perjod costs divided by the number of quailable Garaglite 4 the even The company has two mixer costs ie Pharmacy and laborgtory

(9) Pharmay Variable Cost 1 =$(237200 - 217600) . (4500-4100) patents :$ 49 per patient day Fixed cost = $(237200 - $_[4500 patient X $49) $ 16700 (b) Laboratory_ Vargable cost : $ (1OS600 - 98400) - $ 180 84500 - 4100) patients patient Fixed cost $C 105600 - $ = $ 24600 (4500 patiegtx $18) Laboratory $18 per patient lay Vaugble Fixed Pharmacy / $ 49 per patent day $ 16700 $ 24600