"I don't understand this cost report at all," exclaimed Jeff Mahoney, the newly appointed administrator of Mountainview General Hospital. "Our administrative costs in the new pediatrics clinic are all over the map. One month, the report shows $8,300, and the next month, it's $16,100. What's going on?"
Mahoney's question was posed to Megan McPherson, the hospital's director of Cost Management. "The main problem is that the clinic has experienced some widely varying patient loads in its first year of operation. There seems to be some confusion in the public's mind about what services we offer in the clinic. When do they come to the clinic? When do they go to the emergency room? That sort of thing. As the patient load has varied, we've frequently changed our clinic administrative staffing."
Mahoney continued to puzzle over the report. "Could you pull some data together, Megan, so we can see how this cost behaves over a range of patient loads?"
"You'll have it this afternoon," McPherson responded. Later that morning, she gathered the following data:
Month Patient Load Administrative Costs January 1,400 $13,900 February 500 7,000 March 400 6,000 April 1,000 10,000 May 1,300 11,900 June 900 9,200 July 1,100 10,200 August 300 4,100 September 700 9,400 October 1,200 11,100 November 600 8,300 December 1,500 16,100
McPherson does not believe the first year's widely fluctuating patient load will be experienced again in the future. She has estimated that the clinic's relevant range of monthly activity in the future will be 600 to 1,200 patients.
INSTRUCTIONS: 1. Use the high-low method to estimate the cost behavior for the clinic's administrative costs. Express the cost behavior in formula form (Y = a + bX). 2. Using your answer to Part 1, what is the variable cost per patient? What is the fixed cost? 3. Using your answer to Part 1, determine the predicted clinic's administrative cost during a month when 800 patients visit the clinic.
The solution computes the variable cost using high-low method. It also determine the cost behavior in formula form and compute administrative cost for given situation.