Question

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 McDonough, 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," McDonough responded. Later that morning, she gathered the following data: Month Patient Load Administrative Cost 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 McDonough 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. Required: 1-a. 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). 1-b. Text 3. Which of the following points should be included in a memo to the hospital administrator regarding these estimates?

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 McDonough, 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," McDonough responded. Later that morning, she gathered the following data:

Month Patient Load Administrative Cost
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

McDonough 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.

Required:
1-a. 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).
1-b. Text 3. Which of the following points should be included in a memo to the hospital administrator regarding these estimates?

Added by Ana T.

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