(SOLVED)- I don t understand this cost report at all exclaimed Jeff


Question Description:

$20

‘I don’t understand this cost report at all’, exclaimed Jeff Mahoney, the newly appointed administrator of Bunyip General Hospital. ‘Our administrative costs in the new pediatrics clinic are difficult to understand. One month the report shows $8300, and the next month it’s $16,100. What’s going on?’
Mahoney’s question was posed to Megan McDonough, the hospital’s accountant. ‘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 outpatients’ department? That sort of thing. As the patient load has varied, we’ve frequently changed our clinic administrative staffing. Also, we have found that the number of emergency procedures varies each month, and emergency procedures cause additional staff costs.’
Mahoney continued to puzzle over the report. ‘Could you put 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 that the first year’s widely fluctuating patient load will be experienced again in the future. She has estimated that the clinic’s relevant range f monthly activity in the future will be 600 to 1200 patients.
Required:
1. Draw a scatter diagram of the clinic’s administrative costs and patient loads during its first year of operations.
2. Mark the clinic’s relevant range of activity on the scatter diagram.
3. Use the high-low method to estimate the behaviour of the clinic’s administrative costs based on patient load within the relevant range. Use an equation to express the results of this estimation method.
4. What is your prediction of the clinic’s administrative cost during the month when 800 patients visit the hospital? When 300 patients visit?
5. Identify the number of emergency procedures, patient load, and administrative costs, for each month within the relevant range.
6. Construct an Excel spreadsheet, and use regression analysis to estimate:
(a) An equation with patient load predicting administrative cost, within the relevant range.
(b) The clinic’s administrative cost during the month when 800 patients visit the hospital.
(c) An equation with both activities-patient load and the number of emergency procedures- predicting administrative cost, within the relevant range.
(d) The clinic’s administrative cost during the month when 800 patients visit the hospital and there are 12 emergency procedures using the equations from part c.
7. Does the inclusion of the additional cost driver of ’emergency procedures’ improve the model? Explain your answer.
8. How confident should McDonough be about the three cost models (high-low, simple regression and multiple regression) that she has developed? Explain your answer.

Answer

$20