Answered Essay: High-Low Method and Predicting Cost Black Forest Clinic contains 340 beds. The average occupancy ra

PROBLEM 5-10 High-Low Method and Predicting Cost (LOI, LO3) Black Forest Clinic contains 340 beds. The average occupancy rate is 85% per month. In other words, an average of 85% of the clinics beds are occupied by patients. At this level of occupancy, the clinics oper- ating costs are $40 per occupied bed per day, assuming a 30-day month. This $40 cost contains both vari- CHEC (1) S3 able and fixed cost elements During November, the clinics occupancy rate was only 70%. A total of $339,150 in operating cost was incurred during the month. 28q beds ava Required: 1. 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. Assume an occupancy rate of 80% per month. What amount of total operating cost would you ex- pect the clinic to incur? 2.

High-Low Method and Predicting Cost Black Forest Clinic contains 340 beds. The average occupancy rate is 85% per month. In other words, an average of 85% of the clinic’s beds are occupied by patients. At this level of occupancy, the clinics operating costs are $40 per occupied bed per day, assuming a 30-day month. This $40 cost contains both variable and fixed cost elements. During November, the clinic’s occupancy rate was only 70%. A total of $339,150 in operating cost was incurred during the month. Required: 1. 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 80% per month. What amount of total operating cost would you expect the clinic to incur?

Expert Answer

 

Solution:

1. a) Calculation of the Variable Cost per Occupied bed on a Daily Basis, by using High-Low Method:

Difference in Cost:

Monthly Operating Costs at 85% Occupancy:

340 beds * 85% = 289 beds;

289 beds * 30 days * $40 per bed – day

$346,800
Monthly operating costs at 70% occupancy $339,150
Difference in Cost $7,650

Difference in Activity:

85% occupancy (340 beds * 85% * 30 days) 8,670
70% occupancy (340 beds * 70% * 30 days) 7,140
Difference in Activity 1,530

emph{Variable Cost Per Bed} =frac{emph{Change in Cost}}{emph{Change in Activity}}

emph{Variable Cost Per Bed} = frac{$7,650}{1,530}

emph{Variable Cost Per Bed} = $5

Therefore, the Variable Cost Per Bed Occupied is $5.

b) Calculation of the Total Fixed Operating Costs Per Month:

Monthly operating costs at 85% occupancy $346,800
Less: Variable Costs 289 beds * 30 days * $5 per bed – day $43,350
Fixed Operating Costs Per Month $303,450

Therefore, the Fixed Operating Costs Per Month is $303,450.

2) Calculation of the Amount of Total Operating Costs would Expect the Clinic to Incur:

340 Beds * 80% = 272 beds occupied:
Fixed Costs $303,450
Variable Costs 272 beds * 30 days * $5 per bed – day $40,800
Total Expected Operating Costs $344,250

Therefore, the Amount of Total Operating Costs is $344,250.

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