3-10 EXERCISE3-10 High-Low Method; Predicting Cost St. Mark\'s Hospital contains

Question

3-10

EXERCISE3-10 High-Low Method; Predicting Cost

St. Mark's Hospital contains 450 beds. The average occupancy rate is 80% a month. In other words on average, 80% of the hospital's beds are occupied by patients. At this level of occupany, the hospitals operating costs are $32 per occupied bed per day, assuming a 30-day month. This $32 figure contains both variable and fixed cost
elements.
During June, the hospital's occupancy rate was only 60%. A total of $326,700 in operating cost was incurred during the month.

Required:
l. Using the high-low method, estimate:
a. The variable cost per occupied bed on a daily basis.
b. The total fixed operating costs per month.
2. Assume an occupancy rate of 70% per month. What amount of total operating cost would you expect the hospital to incur?

Explanation / Answer

At 80% occupancy, no of beds occupied = 450*80% = 360 So No of occupied bed days = 360*30 = 10800 Total Operating cost for 30 days = 10800*$32 = $345,600 At 60% occupancy, no of beds occupied = 450*60% = 270 So No of occupied bed days = 270*30 = 8100 Total Operating cost for 30 days = $326,700 Using High low method, Differnce in bed days = 80%-60% = 20%*450*30 = 90*30 = 2700 beddays Diff of Operating cost = 345600-326700 = $18900 So Variable Cost per bed day= $18900/2700 =$7 Fixed Cost = Total Operating cost at 60% - Var cost for 60% occupancy beddays ie FC = $326700 - 8100*$7 = $270,000 Cost Function, C = 270,000 + 7*B where, C = total Cost B = Occupied Bed Days 2. For 70% occupancy, Bed days are 450*70%*30 = 9450 So Operating cost = 270,000+7*9450 = $336,150

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