You have been appointed as the costing manager of a large health club having a membership of around 2000–2500 members. The club provides personal trainers for its members on request as an add-on facility. The club pays a small salary to the hired personal trainers as remuneration. In addition to this, these trainers are paid commission for each lesson to the members. Additionally, the club has a swimming pool and contracts instructors for swimming classes. Your club also has a fruit juice bar that sells a few lunch items, such as sandwiches.
Consider the given scenario and discuss the following:
How will you evaluate the fixed costs of the health club?
How will you arrive at the total variable costs the club incurs?
To evaluate the fixed costs of the health club, you would need to identify the expenses that do not vary with the number of members or the volume of services provided. Fixed costs are those that remain constant over a certain period, regardless of changes in the level of activity. Here are steps to evaluate the fixed costs:
1. Identify the expenses: Begin by listing all the expenses that would remain the same regardless of the number of members or services provided. These may include the costs of rent or mortgage for the premises, insurance premiums, property taxes, administrative salaries, utilities (such as electricity and water), and maintenance fees.
2. Calculate monthly costs: Determine the monthly amount for each fixed expense. This can be achieved by dividing annual expenses by 12. For example, if the rent is $60,000 per year, the monthly rent cost would be $60,000 / 12 = $5,000.
3. Sum up the fixed costs: Add up all the monthly fixed costs identified in step 2. The sum will provide the total fixed costs for the health club. These costs remain constant regardless of variations in membership or services.
To calculate total variable costs, you need to consider the expenses that change in proportion to the level of activity. Variable costs are directly correlated to the number of members or the volume of services provided. Here's how to arrive at the total variable costs:
1. Identify variable expenses: Make a list of expenses that are directly related to the level of activity in the club. These may include trainers' commissions, swimming instructors' fees, raw materials for the juice bar, and any other costs that increase or decrease with usage or sales.
2. Estimate variable cost per unit: Determine the variable cost associated with each unit of activity. For example, if trainers are paid a commission of $10 per lesson and an average member takes four lessons per month, the variable cost per member for trainers' commissions would be $10 x 4 = $40.
3. Calculate total variable costs: Multiply the variable cost per unit (step 2) by the total number of units. In this case, multiply the variable cost per member (e.g., $40) by the number of members to get the total variable costs.
By evaluating the fixed costs and calculating the total variable costs, you can gain insights into the cost structure of the health club and make informed decisions related to pricing, profitability, and cost management.