Question

In: Accounting

The following is information pertaining to a local fitness club, Fitness for Life. Month Club Membership...

The following is information pertaining to a local fitness club, Fitness for Life.
Month Club Membership (number of members) Total Operating Costs
July 450 $                      8,900
August 480 $                      9,800
September 500 $                   10,100
October 550 $                   10,150
November 560 $                   10,500
December 525 $                   10,200
1. By looking at the Total Operating Costs and the Average Operating Costs Per Member, can you tell whether the club's operating costs are variable, fixed, or mixed?
2. Perform Regression analysis using Microsoft Excel. What is the monthly operating cost equation? What is the R-square?
3. Use the high-low method to determine the club's monthly operating cost equation.
4. Can we predict total montly operating costs if the club has 3,000 members?

Solutions

Expert Solution

1.
The cost is mixed cost, since cost is increasing with increase in output but not with direct proportion

2. Cost equation = $3912.35 + $11.80 x
R Square = 0.8007

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.894816
R Square 0.800696
Adjusted R Square 0.75087
Standard Error 278.0903
Observations 6
ANOVA
df SS MS F Significance F
Regression 1 1242747 1242747 16.06982 0.016014
Residual 4 309336.8 77334.19
Total 5 1552083
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 3912.354 1508.329 2.593834 0.060439 -275.438 8100.146 -275.438 8100.146
Number of Members 11.8029 2.944307 4.008718 0.016014 3.62819 19.9776 3.62819 19.9776

3. High low method
Variable cost per unit = ($10500-8900)/(560-450) = $14.55 per unit
Fixed Cost = 10500 - 560 x 14.55 = $2352

Cost Equation = $2352 + 14.55 x

4. Cost for 3000 members
using high low equation = $2352 + 14.55 x 3000 = $46002
using regression = $3912.35 + 11.80 x 3000 = $39312.35

If you have any query regarding this, kindly comment with your query


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