Southbend Medical Clinic Offers a Number of Specialized Medical Services

Essay

Southbend Medical Clinic offers a number of specialized medical services.A review of data for the year just ended revealed variable costs of $32 per patient day;annual fixed costs of $480,000,which are incurred evenly throughout the year;and semivariable costs that displayed the following behavior at the "peak" and "valley" of activity:
January (2,400 patient days): $258,400
August (2,900 patient days): $278,900
Required:
A.Analysis of semivariable cost (variable portion):
($278,900 - $258,400)/ (2,900 - 2,400)= $41 per patient day

A.Calculate the total cost for an upcoming month (2,800 patient days)if current cost behavior patterns continue.Southbend uses the high-low method to analyze cost behavior.
B.No.The "peak" and "valley" of operation were 2,900 patient days and 2,400 patient days,respectively.The 3,800-patient-day data point is well outside this range of observed cost relationships and recent activity (i.e. ,the relevant range).Costs can change outside of this range (e.g. ,fixed costs may be higher),and the lack of past experience will likely create unknowns for the analyst.
B.There is a high probability that Southbend's volume will increase in forthcoming months as patients take advantage of new scientific advances.Can the data and methodology used in part (a)for predicting the costs of 2,800 patient days be employed to estimate the costs for,say,3,800 patient days? Why or why not?