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 avaliable for planning purposes.
The assistant is unsure how to classify the utilities cost 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 larger 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 60 $2,200
Feburary 70 $2,600
March 90 $2,900
April 120 $3,300
May 100 $3,000
June 130 $3,600
July 150 $4,000
August 140 $3,600
September 110 $3,100
October 80 $2,500
The chief administration 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 scatter-graph. The assistant feels, however, that if an analysis of this type necessary, then the high-low method should be used, because it is easily 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 of Y=a+bX
2. Prepare a scattergraph using the data above. (The number of scans should be placed on the horizontal axis, and utilities cost should be placed on the vertical axis.) Fit a straight line to the plotted points using a ruler and estimate a cost formula for utilities using the quick-and-dirty method.