2023 Practice Exercise 7 I Analyzing Mixed Costs The Metropolis Health System MHS has | Assignments Online
2023 Practice Exercise 7 I Analyzing Mixed Costs The Metropolis Health System MHS has | Assignments Online
Assignments Online 2023 Business & Finance
Practice Exercise 7–I: Analyzing Mixed Costs
The Metropolis Health System (MHS) has a system-wide training course for nurse aides. The course requires a packet of materials that MHS calls the training pack. Due to turnover and because the course is system-wide, there is a monthly demand for new packs. In addition, the local community college also obtains the training packs used in their credit courses from MHS.
The education coordinator needs to know how much of the cost is fixed and how much of the cost is variable for these training packs. She decides to use the high–low method of computation.
Required
Using the monthly utilization information presented below, find the fixed and variable portion of costs through the high–low method.
Month Number of Training Packs Cost
January 1,000 $6,200
February 200 $1,820
March 250 $2,350
April 400 $3,440
May 700 $4,900
June 300 $2,730
July 150 $1,470
August 100 $1,010
September 1,100 $7,150
October 300 $2,850
November 250 $2,300
December 100 $1,010
Exercise 7–1: Analyzing Mixed Costs
The education coordinator decides that the community college packs may be unduly influencing the high–low computation. She decides to rerun the results, omitting the community college volume.
1. Using the monthly utilization information presented here, and omitting the community college training packs, find the fixed and variable portion of costs through the high–low method. Note that the college only acquires packs in three months of the year: January, May, and September. These dates coincide with the start dates of their semesters and summer school.
2. The reason the education coordinator needs to know how much of the cost is fixed is because she is supposed to collect the appropriate variable cost from the community college for their packs. For her purposes, which computation do you believe is better? Why?
Month Total Number of Training Packs Total Cost Community College Number Packs Community College Cost
January 1,000 $6,200 200 $1,240
February 200 $1,820
March 250 $2,350
April 400 $3,440
May 700 $4,900 300 $2,100
June 300 $2,730
July 150 $1,470
August 100 $1,010
September 1,100 $7,150 300 $1,950
October 300 $2,850
November 250 $2,300
December 100 $1,010
Example 7B: Contribution Margin
Computation of a contribution margin is simplified if the fixed and variable expense has already been determined. Examine Table 7–1, which contains Operating Room fixed and variable costs. We can see that the total costs are $1,217,756. Of this amount, $600,822 is designated as variable cost and $616,934 is designated as fixed ($529,556 1 $87,378 = $616,934). For purposes of our example, assume the Operating Room revenue amounts to $1,260,000. The contribution margin is computed as follows:
Amount
Revenue $1,260,000
Less Variable Cost (600,822)
Contribution Margin $659,178
Thus, $659,178 is available to contribute to fixed costs and to profit. (In this example fixed costs amount to $616,934, so there is an amount left to contribute toward profit.)
Practice Exercise 7–II: Calculating the Contribution Margin
Greenside Clinic has revenue totaling $3,500,000. The clinic has costs totaling $3,450,000. Of this amount, 40% is variable cost and 60% is fixed cost.
Compute the contribution margin for Greenside Clinic.
Exercise 7–2: Calculating the Contribution Margin
The Mental Health program for the Community Center has just completed its fiscal year end. The program director determines that his program has revenue for the year of $1,210,000. He believes his variable expense amounts to $205,000 and he knows his fixed expense amounts to $1,100,000.
Required
1. Compute the contribution margin for the Community Center Mental Health Program.
2. What does the result tell you about the program?
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