A.
A hospital is analyzing its overhead costs. It is not clear whether the number of patient days or nursing hours would be the best cost driver to use in predicting the hospitals overhead. The latest information on the hospital is as follows:
Required:
Graph the hospitals overhead costs against the number of patient days. Note: This is for your benefit so that you can answer Question 3; you do not need to submit this graph as part of the assignment.
Graph the hospitals overhead costs against nursing hours. Note: This is for your benefit so that you can answer Question 3; you do not need to submit this graph as part of the assignment.
Based on the graphs that you drew, do the data appear to be straight forward or do you see any potential problems with the data (i.e, do the data points form straight lines)? Please explain.
Using the high-low method, determine the hospitals variable cost per nursing hour, rounded to two decimal places.
Now that you have calculated both the variable and fixed portions hospital overhead costs, write out the equation for hospital overhead costs using the high-low method.
Using the cost equation that you just wrote, predict hospital overhead costs if 54,000 nursing hours are expended in a month.
The hospital ran a regression analysis using nursing hours as the cost driver to predict total hospital overhead costs. The regression analysis produced the following data:
Intercept
346245
Slope
12.81796
RSQ
0.909311
Round the variable portion of the regression equation formula to two decimal places. Based on the regression equation formula, what will the predicted total hospital overhead costs be if 54,000 nursing hours are expended during a month?
The hospital then ran a regression analysis using number of patient days as cost driver. The regression analysis produced the following data:
Intercept
559764
Slope
47.970926
RSQ
0.563496482
Again, round the variable portion of the regression equation to two decimal places. If 9,500 patient days are predicted for a month, what is the total predicted hospital overhead costs using the regression equation?
Which regression equation, the one using nursing hours as the cost driver or the one using patient days as the cost driver, produces the most accurate correlation (best explanation of) the predicted hospital overhead costs. How do you know that your answer is correct? In other words, justify your answer.
