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Officials of the Oakbrook Hills Golf and Tennis Club are in the process of preparing a budget for the year ending December 31. Because the club treasurer has had difficulty with two expense items, the process has been delayed. The two items are mixed costs- expenses for electricity and for repairs and maintenance-and the treasurer has been having trouble breaking them down into their variable and fixed components.
An accountant friend has suggested that he use the high-low method to divide the costs into their variable and fixed parts. The spending patterns and activity measures related to each cost during the past year are as follows:
Month
Electricity Expense
Repairs and Maintenance
Amount
Kilowatt-Hours
Labor Hours
January
$7,500
210,000
$7,578
220
February
8,255
240,200
7,852
230
March
8,165
236,600
7,304
210
April
8,960
268,400
7,030
200
May
7,520
210,800
June
7,025
191,000
8,126
240
July
6,970
188,800
8,400
250
August
6,990
189,600
8,674
260
September
7,055
192,200
8,948
270
October
7,135
195,400
November
8,560
252,400
December
8,415
246,600
Totals
$92,550
2,622,000
$96,416
2,840
Required:
1. Using the high-low method, compute the variable cost rates used last year for each expense. What was the monthly fixed cost for electricity and for repairs and maintenance? (Round variable cost rate answers to three decimal places.)
2. Compute the total variable cost and total fixed cost for each expense category for last year.
3. The treasurer believes that in the coming year, the electricity rate will increase by $0.005 and the repairs rate, by $1.20. Usage of all items and their fixed cost amounts will remain constant. Compute the projected total cost for each category. How will the cost increases affect the club's profits and cash flow?
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