Cheyenne Corporation operates a small medical lab in Wyoming that conducts minor medical procedures (including blood tests and x-rays) for a number of doctors. The lab consumes various medical supplies and is staffed by two technicians, both of whom are paid a monthly salary. In addition, there is an on-site office manager who is also paid by the month.Required: A. If the lab's patient count increases by 15%, will the lab's total operating costs increase by 15%? Explain.B. Cheyenne is considering opening an additional lab in a new suburban medical building. What will likely happen to the lab's level of fixed cost incurrence? Why?C. What analysis methods would be available to the office manager and/or Cheyenne management if a close look at the lab's cost behavior is desired?

Question

What will be an ideal response?

Answer 1

A. No. The lab has a mixture of both variable and fixed costs. Variable costs (such as supplies) will increase, directly paralleling the increase in clients. The salaries of the technicians and office manager are step-fixed in nature, meaning that a 15% hike in client load will likely do nothing to these expenditures. A possibility exists, though, that an increase in patient load could create the need for an added technician.
B. Fixed costs typically do not change when activity changes. However, the opening of a new branch will create the need for added technicians and presumably another office manager, thus causing costs to rise. In addition, facility rental charges will increase and there will be an added cost if the firm leases and/or depreciates equipment. Note: This answer assumes that the original facility will continue with existing personnel and not implement a job-sharing arrangement through a cutback in operating hours.
C. Possible methods include account classification, visual fit, high-low, and least-squares regression.