Question:
“I don’t understand this cost report at all,†exclaimed Jeff Mahoney, the newly appointed administrator of Valley General Hospital. “Our administrative costs in the new pediatrics clinic are all over the map. One month the report shows $7,000, and the next month it’s $13,900. What’s going on?â€
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.â€
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:
![“I don’t understand this cost report at all,” exclaimed Jeff Mahoney, the newly appointed administrator of Valley General Hospital. “Our administrative costs in the new pediatrics clinic are all over the map. One month the report shows $7,000, and the next month it’s $13,900. 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:
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. Draw a scatter diagram of the clinic’s administrative costs during its first year of operation.
2. Visually fit a curvilinear cost line to the plotted data.
3. Mark the clinic’s relevant range of activity on the scatter diagram.
4. Visually fit a semivariable-cost line to approximate the curvilinear cost behavior pattern within the clinic’s relevant range.
5. Estimate the fixed- and variable-cost components of the visually fit semivariable-cost line.
6. Use an equation to express the semivariable-cost approximation of the clinic’s administrative costs.
7. What is your prediction of the clinic’s administrative cost during a month when 750 patients visit the clinic? When 350 patients visit? Which one of your visually fit cost lines did you use to make each of these predictions? Why?
Required:
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 5 a 1 bX). What is the variable cost per patient?
2. Build a spreadsheet: Construct an Excel spreadsheet and use the Excel commands to perform a least-squares regression and estimate the administrative cost behavior. Express the cost behavior in formula form. What is the variable cost per patient? Compute and interpret the R2 value for the regression.
3. Write a memo to the hospital administrator comparing the cost estimates using
(a) least-squares regression,
(b) the high-low method, and
(c) the scatter diagram and visually fit semivariable-cost line from the preceding case [requirements (4) and (5)]. Make a recommendation as to which estimate should be used, and support your recommendation. Make any other suggestions you feel are appropriate.
4. After receiving the memo comparing the three cost estimates, Mahoney called McDonough to discuss the matter. The following exchange occurred.
Mahoney: “As you know, Megan, I was never in favor of this clinic. It’s going to be a drag on our
administrative staff, and we’d have been far better off keeping the pediatrics operation here in the hospital.”
McDonough: “I was aware that you felt the clinic was a mistake. Of course, the board of trustees had other issues to consider. I believe the board felt the clinic should be built to make pediatric care more accessible to the economically depressed area on the other side of the city.”
Mahoney: “That’s true, but the board doesn’t realize how difficult it’s going to make life for us here in the hospital. In any case, I called to tell you that when you and I report to the board next week, I’m going to recommend that the clinic be shut down. I want you to support my recommendation with one of your cost estimates showing that administrative costs will soar at high activity levels.”
McDonough: “But that estimate was based on the high-low method. It’s not an appropriate method for this situation.”
Mahoney: “It is an estimate, Megan, and it’s based on a well-known estimation method. This is just the ammunition I need to make the board see things my way.”
McDonough: “I don’t know, Jeff. I just don’t think I can go along with that.”
Mahoney: “Be a team player, Megan. I’ve got a meeting now. Got to run.”
That night McDonough called to discuss the matter with her best friend, you. What would you
advise her?](../images/i-dont-understand-this-cost-report-at-all-exclaimed-41606-1.jpg)
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. Draw a scatter diagram of the clinic’s administrative costs during its first year of operation.
2. Visually fit a curvilinear cost line to the plotted data.
3. Mark the clinic’s relevant range of activity on the scatter diagram.
4. Visually fit a semivariable-cost line to approximate the curvilinear cost behavior pattern within the clinic’s relevant range.
5. Estimate the fixed- and variable-cost components of the visually fit semivariable-cost line.
6. Use an equation to express the semivariable-cost approximation of the clinic’s administrative costs.
7. What is your prediction of the clinic’s administrative cost during a month when 750 patients visit the clinic? When 350 patients visit? Which one of your visually fit cost lines did you use to make each of these predictions? Why?
Required:
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 5 a 1 bX). What is the variable cost per patient?
2. Build a spreadsheet: Construct an Excel spreadsheet and use the Excel commands to perform a least-squares regression and estimate the administrative cost behavior. Express the cost behavior in formula form. What is the variable cost per patient? Compute and interpret the R2 value for the regression.
3. Write a memo to the hospital administrator comparing the cost estimates using
(a) least-squares regression,
(b) the high-low method, and
(c) the scatter diagram and visually fit semivariable-cost line from the preceding case [requirements (4) and (5)]. Make a recommendation as to which estimate should be used, and support your recommendation. Make any other suggestions you feel are appropriate.
4. After receiving the memo comparing the three cost estimates, Mahoney called McDonough to discuss the matter. The following exchange occurred.
Mahoney: “As you know, Megan, I was never in favor of this clinic. It’s going to be a drag on our
administrative staff, and we’d have been far better off keeping the pediatrics operation here in the hospital.â€
McDonough: “I was aware that you felt the clinic was a mistake. Of course, the board of trustees had other issues to consider. I believe the board felt the clinic should be built to make pediatric care more accessible to the economically depressed area on the other side of the city.â€
Mahoney: “That’s true, but the board doesn’t realize how difficult it’s going to make life for us here in the hospital. In any case, I called to tell you that when you and I report to the board next week, I’m going to recommend that the clinic be shut down. I want you to support my recommendation with one of your cost estimates showing that administrative costs will soar at high activity levels.â€
McDonough: “But that estimate was based on the high-low method. It’s not an appropriate method for this situation.â€
Mahoney: “It is an estimate, Megan, and it’s based on a well-known estimation method. This is just the ammunition I need to make the board see things my way.â€
McDonough: “I don’t know, Jeff. I just don’t think I can go along with that.â€
Mahoney: “Be a team player, Megan. I’ve got a meeting now. Got to run.â€
That night McDonough called to discuss the matter with her best friend, you. What would you
advise her?
Transcribed Image Text:
Month Patient Load Administrative Cost January February $ 6,000 7,000 400 500 March 1,400 13,900 April 900 9,200 May 1,300 11,900 June 1,000 10,000 July 700 9,400 August 300 4,100 September 1,100 10,200 October 1,500 16,100 November 600 8,300 December 1,200 11,100
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