Your hospital has been approached by a major HMO to perform all their MSDRG 505 cases (foot...

Question:

Your hospital has been approached by a major HMO to perform all their MSDRG 505 cases (foot surgeries). They have offered a flat payment of $8,000 per case. You have reviewed your charges for MSDRG 505 during the last year and found the following profile:

Average Charge: $11,300

Average LOS: 4.5

Days Cost/Charge Variable Cost %
Routine Charge $3,200 0.75 65
Operating Room 1,850 0.70 80
Anesthesiology 210 0.70 75
Lab 575 0.65 40
Radiology 275 0.65 50
Medical Supplies 3,220 0.60 85
Pharmacy 955 0.55 85
Other Ancillary 1,015 0.75 55
Total Ancillary $8,100 0.70 75

1.) In the above data set, assume that the hospital's cost-to-charge ratio is 0.75 for routine services and 0.70 for Total Ancillary services. Using this information, what would the average cost of MSDRG 505 be? (Your answer might be slightly different due to rounding. Pick the closest.)

Average Variable Cost:

The average variable cost refers to the variable cost incurred in the production of a single unit. The average variable cost is calculated by adding all the variable costs and dividing it by the number of units produced.

Answer and Explanation:

{eq}\text{Average Variable Cost (AVC)} = \ \frac{\text{Variable Cost (VC)}}{\text{Quantity (Q)}} {/eq}

We don't have a Quantity, so we will use Sales Revenue (SR).

{eq}\text{Variable Cost percent (VC %)} = \ \frac{\text{Variable Cost (VC)}}{\text{Sales Revenue (SR)}} \\ 75\% \ = \ \frac{VC}{11,300} \\ 0.75 \ \times \ 11,300 \ = \ VC \\ VC \ = \ 8,475 {/eq}


Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

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