70.2K

Verified Solution

Link Copied!

Cost Behavior, High-Low Method, Pricing Decision

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 4,100 patient days of activity. During February, the activity was 4,500 patient days. Costs for these two levels of activity output are as follows:

CoursHeroTranscribedText: 4,100 Patient 4,500 Patient Days Days Salaries, nurses $ 58,000 $ 58,000 Aides 34,600 34,600 Pharmacy 217,600 237,200 Laboratory 98,400 105,600 Depreciation 26,800 26,800 Laundry 184,090 202,050 Administration 27,700 27,700 Lease (equipment) 36,100 36,100

Answer & Explanation Solved by verified expert

See Answer