Case 6-49 (Note : lnsn'uctors who wish to cover all three cost estimation methods with the same data set may assign this case in conjunction with the following case

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Case 6-49 (Note : lnsn'uctors who wish to cover all three cost estimation methods with the same data set may assign this case in conjunction with the following case .} " Idon't understand this cost report at all," exclaimed Jeff Mahoney ,the newly appointed administrator of Valley General Hospital. " Our administrative costs in the new pediatrics clinic are all over the map . One month the report shows $ 7,000 , and the next month it's $ 13,900 . What's going on?" Maboney's question was posed to Megan M cDonough, the hospital's director of cost management ." 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 emergency room ? That sort of thing . As the patient load has varied , we've frequently changed our clinic administrative staf?ng ." Mahoney continued to puzzle over the report ." Could you pull 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 fol— lowing data: Month Patient Load Administrative Cost Month Patient Load Administrative Cost January .................................................... 400 .................................................... $ 6,000 February .................................................. 50 0 .................................................... 7, 000 M arch ...................................................... 1,400 .................................................... 13,900 April ......................................................... 9 0 0 .................................................... 9,200 May ......................................................... 1,300 .................................................... 1 1 ,9 0 0 June ........................................................ 1,000 .................................................... 10, 000 July .......................................................... 700 .................................................... 9,400 August ..................................................... 300 .................................................... 4,100 September ............................................... 1 ,1 0 0 .................................................... 10,200 October .................................................... 1,5 00 .................................................... 16,100 November ................................................ 600 .................................................... 8,300 December ................................................ 1,200 .................................................... 1 1,100 McDonough does not behave the ?rst year's widely ?uctuating patient load will be experienced again in the future .She has estimated that the clinic's relevant range of monthly activity in the future will be 600 to 1,200 patients . Required 1. Use the high — low method to estimate the cost behavior for the clinic's administrative costs. Express the cost behavior in formula form (Y = a + bX }. What is the variable cost per patient ? 2. Build a spreadsheet :Construct an Excel spreadsheet and use the Excel commands to perform a least — squares regression and estimate the administrative cost behavior .Express the cost behavior in formula form . What is the variable cost per patient ? Compute and interpret the R2 value for the regression 3. Write a memo to the hospital administrator comparing the cost estimates using (a ) least - squares regression ,(b )the high — low method , and (c ) the scatter diagram and visually fit semivariable - cost line from the preceding case [requirements (4) and (5)]. Make a recommendation as to which esti —mate should be used , and support your recommendation .Make any other suggestions you feel are appropriate