Mernda Health Care Centre recently began to offer day surgery procedures. The Centre was not experienced in the costing of such services and, as a temporary measure, the subsidised patientday charge was set at $100. This charge was similar to other providers in the region. Management decided to review the charge once cost data was available for the first two months of operations. The following data was collected by the accounting department, together with the number of patient days.

Required

(a) Classify each cost as fixed, variable or mixed, using patient days as the cost driver. 

(b) Use the high-low method to separate mixed costs into their fixed and variable components.

(c) The accounting department has estimated that the average patient days per month will be 2000. If the Centre is to be operated as a not-for-profit, how much will it need to charge per patient day?

(d) Suppose the Centre averages 2500 patient days per month. How much would need to be charged per patient day for the Centre to cover costs?

(e) Explain why the per-patient-day charge decreased in (d) above.

(f) Briefly explain the benefit of the classification of costs in the planning for the Centre.

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Month 1 Month 2 – Cost category 2100 patient days 2250 patient days Salaries, nurses $ 6000 $ 6000 Aides 1200 1200 Laboratory Pharmacy Depreciation Laundry 110000 117 500 $ 31 000 $ 32 500 11 800 11 800 16 800 18 000 Administration 12 000 12 000 Lease (equipment) 30 000 30 000 Total $218 800 $229 000