Question

As the new manager of a local fitness club, Gifted & Lifted, you have been studying

the club’s financial data. You would like to determine how the club’s costs behave in

order to make accurate predictions for next year. Here is the information from the

last six months:

Month	Club enrollment (# of members)	Total operating costs	Operating Costs per member
July	450	$8,900	$19.78
August	480	$9,800	$20.42
September	500	$10,100	$20.20
October	550	$10,150	$18.45
November	560	$10,500	$18.75
December	525	$10,200	$19.43

1-By looking at the “Total Operating Costs” and the “Operating Costs per Member,” can you tell whether the club’s operating costs are variable, fixed, or mixed? Explain your answer

2- List 10 costs the club might have and be sure to label them “fixed” or “variable”

3-Use high-low method to determine the club’s monthly operating cost equation.

4-Using the answer from number 3, predict the total monthly operating costs if the club has 800 members. What if instead you have 390 members? 1,000 members?

5-Can you predict total monthly operating costs if the club has 3,000 members? Explain your answer

Answer 1

Solution 1:

As total operating cost is changing with the Number of members, therefore same cannot be considerd as fixed. Further operating cost per member is also not constant, therefore operating cost cannot be considered as variable. Therefore Club's operating cost are mixed.

Solution 2:

List of cost the club might have and be sure to label them "Fixed" or "Variable"

1. Rent - Fixed

2. Electricity - Variable

3. Trainer Fee - Variable

4. Food cost - Varible

5. Administrative Salary - Fixed

6. Equipment depreciation - Fixed

7. Insurance - Fixed

8. Uniform Expenses - Variable

9. Rates and taxes = Fixed

10. Fuel expenses - variable

Solution 3:

Operating cost at 450 members = $8,900

Operating cost at 560 members = $10,500

Variable cost using high low method = (Cost at high level - Cost at low level) / (high level activity - low level activity)

= ($10,500 - $8,900) / (560-450)

= $14.55 per member

Fixed cost = $8,900 - (450*14.545454) = $2.355

Operating cost equation = $2,355 + $14.55 X

Solution 4:

Total monthly operating cost at 800 member = $2,355 + (800*$14.55) = $13,995

Total monthly operating cost at 390 member = $2,355 + (390*$14.55) = $8,030

Total monthly operating cost at 1000 member = $2,355 + (1000*$14.55) = $16,905

Solution 5:

Total monthly operating cost at 3000 member = $2,355 + (3000*$14.55) = $46,005