The administrator of Azalea Hills Hospital would like a cost formula linking the

Question

The administrator of Azalea Hills Hospital would like a cost formula linking the costs involved in admitting patients to the number of patients admitted during a month. The admitting department's costs and the number of patients admitted during the immediately preceding eight months are given in the following table.a) Use the high-low method to establish the fixed and variable components of admitting costs. b) Express the fixed and variable components of admitting costs as a cost formula in the linear equation form Y = a + bX 2. Reveen Products sells camping equipment. One of the company's products, a camping lantern, sells for $90 per unit. Variable expenses are $63 per lantern, and fixed expenses associated with the lantern total $135,000 per month. a) Compute the company's break-even point in number of lanterns and in total sales dollars. b) If the variable expenses per lantern increase as a percentage of the selling price, will it result in a higher or a lower break-even point Why (Assume that the fixed expenses remain unchanged.)

Explanation / Answer

1) Highest -Level of activity in June(1900 patients) and Lowest -Level of activity in November (1100 patients)

Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/labor hours etc. at highest level of activity; and
x1 are the number of units/labor hours etc. at lowest level of activity

V.C per unit = 15200 - 12800/1900-1100

= 2400/800 = $3 per unit

LINEAR EQUATION FORM = a+bX

where, a = FIXED COST

   b = VARIABLE COST PER UNIT

   X = NUMBER OF UNITS

2) a) CALCULATION OF BEP

(in numbers) = Fixed Cost / Contribution per unit

   = 135000/27

   = 5000 units

(in dollars) = Fixed Cost / PV Ratio

   = 135000/70%

   =$192857 (approx)

workings;-

contribution per unit  = selling price - variable cost

   = 90 - 63

= $27

pv ratio   = contribution/selling price * 100

= 27/90 * 100

   = 70%

b) If variable cost increases as a percentage of selling price then it will result in higher break even point , because due to increase in variable cost contribution will decrease and if denominator of fraction decreases then result will increase i.e bep both in amount and dollars.

Variable Cost per Unit = y2 y1 x2 x1

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