Question

Supply costs at Orange Theory gyms are listed below: January February March April May June July August September Client Visits 11,672 (11,468 12,000 14,500 11,732 11,218 12,012 11,703 (11,851 Supply Cost $28,586 $28.420 $28,844 $28.942 $28,647 $28,246 $28,845 $28,603 $28,728 Management believes that supply cost is a mixed cost that depends on client-visits. Required: 1. Use the high-low method to estimate the variable and fixed components of this cost. 2. Estimate the total cost based on 15,000 client visits. YOU MUST SHOW YOUR WORK TO EARN CREDIT!

Answer 1

1. Variable cost = Change in cost / Change in activity

Variable cost = ($28,942 - $28,246) / (14,500 - 11,218)

Variable cost = $696 / 3,282

Variable cost = $0.21 per client-visit

Fixed cost = Total cost - Variable cost element

Fixed cost = $28,942 - ($0.21 per unit × 14,500 client-visits)

Fixed cost = $28,942 - $3,045

Fixed cost = $25,897

2. Total cost = Variable cost + Fixed cost

Total cost = ($0.21 per unit × 15,000 client-visits) + $25,897

Total cost = $29,078