The Elder Clinic, a not-for-profit organization, provides limited medical services to low-income elderly patients. The manager’s summary report for the past four months of operations is reproduced here.

The clinic receives an operating subsidy from the city, but unfortunately, the operating loss that has been incurred through June $(79,392) is larger than anticipated. Part of the problem is the salary increase that went into effect in June, which had been overlooked when the budget was submitted to the city last year. To compound the problem, the warm summer months traditionally bring with them an increase in heat-related health problems. Thus, the clinic is likely to experience an increase in patient visits during July.
The clinic’s managers are considering an increase in patient fees to reduce losses. However, they are reluctant to raise fees because the patients have low incomes. They will raise fees only if it is necessary.

The following questions will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so.
A. Use your judgment to classify costs as fixed, variable, or mixed. Explain how you classified each item.
B. Create a cost function for the Elder Clinic. Use the high-low method to estimate the function for any mixed costs.
C. Use the cost function to estimate July expenses based on a projection of 940 patient visits.
D. List reasons why management of the Elder Clinic cannot know with certainty what the expenses will be during July. List as many reasons as you can.
E. Describe the pros and cons of using your cost estimate from part (C) to decide whether to raise patient fees.
The managers need your July cost estimate to help them decide whether to raise patient fees. Turn in your answer to the following.

F. Use the information you learned from the preceding analyses to write a memo to the director of the Elder Clinic presenting your estimate of July costs. Provide the director with appropriate information for understanding your methodology and evaluating the reliability of your costestimate.

  • CreatedJanuary 26, 2015
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