Pleasant View Hospital of British Columbia has just hired a new chief administrator who is anxious to employ sound management and planning techniques in the business affairs of the hospital. Accordingly, she has directed her assistant to summarize the cost structure of the various departments so that data will be available for planning purposes.
The assistant is unsure how to classify the utilities costs in the Radiology Department because these costs do not exhibit either strictly variable or fixed cost behavior. Utilities costs are very high in the department due to a CAT scanner that draws a large amount of power and is kept running at all times. The scanner can't be turned off due to the long warm-up period required for its use. When the scanner is used to scan a patient, it consumes an additional burst of power. The assistant has accumulated the following data on utilities costs and use of the scanner since the first of the year.

The chief administrator has informed her assistant that the utilities cost is probably a mixed cost that will have to be broken down into its variable and fixed cost elements by use of a scatter graph. The assistant feels, however, that if an analysis of this type is necessary, then the high-low method should be used, since it is easier and quicker. The controller has suggested that there may be a better approach.
Required:
1. Using the high-low method, estimate a cost formula for utilities. Express the formula in the form Y = a + b X. (The variable rate should be stated in terms of cost per scan.)
2. Prepare a scatter graph by plotting the number of scans and utility cost on a graph. Draw a straight line through the two data points that correspond to the high and low levels of activity. Make sure your line intersects the Y -axis.
3. Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis estimated the total fixed costs to be $1,170.90 per month and the variable cost to be $18.18 per scan.
How would the straight line that you drew in requirement 2 differ from a straight line that minimizes the sum of the squared errors?

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Number of Scans 60 70 90 120 100 130 150 140 110 80 Utilities Cost $2,200 $2,600 $2,900 $3,300 $3,000 $3,600 $4,000 $3,600 $3,100 $2,500 Month January April September . October . _ _. . .. _ . . .