Question

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.

Month	Number of Scans	Utilities Cost
January	230	$6,500
February	220	$5,500
March	210	$5,400
April	220	$6,000
May	390	$9,200
June	380	$8,800
July	190	$7,200
August	180	$6,400
September	170	$6,600
October	160	$4,600

       

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 scattergraph. 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 + bX. (The variable rate should be stated in terms of cost per scan.)

	number of scans	utilities cost
high level of activity
low level of activity
change
variable cost element
fixed cost element

Y= ________ + ___________x

Answer 1