Question

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 4.500 patient days. Costs for these two levels of activity output are as follows: Classify each cost as fixed, variable, or mixed, using patient days as the activity driver. Use the high-low method to separate the mixed costs into fixed and variable. 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 how much will it need to charge per patient day? How much of this charge is variable? How much is fixed? 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? Explain why the charge per patient day decreased as the activity output increased.

Answer 1

Costs	Patients Days		Cost Beaviour	Remark
	4200	4500
Salaries Nurse	55000	55000	Fixed Cost	Since the Total Cost Remained Same in two different units of operation.
Aides	32000	32000	Fixed Cost	Since the Total Cost Remained Same in two different units of operation.
Pharmacy	235700	251300	Mixed Cost	A portion of Cost is fixed and and the Remaining portion is Variable
Laboratory	120300	127200	Mixed Cost	A portion of Cost is fixed and and the Remaining portion is Variable
Depreciation	25000	25000	Fixed Cost	Since the Total Cost Remained Same in two different units of operation.
Laundry	20160	20160	Fixed Cost	Since the Total Cost Remained Same in two different units of operation.
Administration	27000	27000	Fixed Cost	Since the Total Cost Remained Same in two different units of operation.
Lease (equipment)	36000	36000	Fixed Cost	Since the Total Cost Remained Same in two different units of operation.
Per unit Calculation
Pharmacy
For 4200 Paitents Days	56.12
For 4500 Paitents Days	55.84
Per unit Calculation
Laboratory
For 4200 Paitents Days	28.64
For 4500 Paitents Days	28.27
Both the Costs are Mixed in Nature, A portion of Cost is fixed and and the Remaining portion is Variable
	Units	Pharmacy	Laboratory
For 4500 Paitents Days	4500	251300	127200
For 4200 Paitents Days	4200	235700	120300
Difference	300	15600	6900
Variable Cost Per Unit		= 15600/300	= 6900/300
		52	23
Total Variable Cost for 4500 units		234000	103500
Fixed Cost (Total Cost -Variable Cost)		17300	23700
Cost for 4300 patients days
Costs	Amounts
Salaries Nurse	55000
Aides	32000
Depreciation	25000
Laundry	20160
Administration	27000
Lease (equipment)	36000
Pharmacy -Fixed Portion	17300
Laboratory -Fixed Portion	23700
Total Fixed Cost	236160
Variable Cost
Pharmacy -Variable Portion (4300*52)	223600
Laboratory -Variable Portion (4300*23)	98900
Total Variable Cost	322500
Total Cost for 4300 patients Days	558660
Amount cargable per patients days	129.92
Cost for 4800 patients days
Costs	Amounts
Salaries Nurse	55000
Aides	32000
Depreciation	25000
Laundry	20160
Administration	27000
Lease (equipment)	36000
Pharmacy -Fixed Portion	17300
Laboratory -Fixed Portion	23700
Total Fixed Cost	236160
Variable Cost
Pharmacy -Variable Portion (4800*52)	249600
Laboratory -Variable Portion (4800*23)	110400
Total Variable Cost	360000
Total Cost for 4800 patients Days	596160
Amount cargable per patients days	124.20