May 2.56 Cost Function Using Account Analysis and High-Low Method The Little Beaver Daycare Centres, a not-for-profit organization, provides daycare services to low-income LO2 families in 20 communities in Alberta. The manager's summary report for the past four months of operations is reproduced here LO3 organization March April June L04 /:genai zeifn/ ^) */ 9:rgene'zeijn/ ) LO6 Number of children 849 821 778 842 3 n. ;;; Daycare fees $4,230 $4,180 $3,875 $4,260 $16 : Daycare staff salaries 13,254 13,256 13,254 14,115 53 Daycare supplies used 3,182 3,077 2,934 3,175 12 Organization ; ORGANIZATION Administrative salaries 3,197 3,198 3,197 3,412 13,004 383 Rent 1,000 1,000 1,000 1,100 4,100 Utilities 226 226 226 226 904 Other expenses 2,854 2,776 2,671 2,828 11,129 Total expenses 23,713 23,533 23,282 24,856 95,384 Operating surplus (loss) $(19,483) $(19,353) $(19,407) $(20,596) $(78,839) The daycare receives an operating subsidy from the province, but unfortunately, the operating loss that has been incurred through June $(79,392) is larger than anticipated. Part of the problem is the salary increase that went into effect in June, which had been overlooked when the budget was submitted to the city last year. To compound the problem, the warm summer months traditionally bring with them an increase in additional summer outdoor activities. Thus, the daycare experiences additional costs during July. The daycare's managers are considering an increase in daycare fees to reduce losses. However, they are reluctant to raise fees because the children are from low-income families. The daycare will raise fees only if necessary. REQUIRED INFORMATION ANALYSIS The following questions will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so. A. Use your judgment to classify costs as fixed, variable, or mixed. Explain how you classified each item. B. Create a cost function for the Little Beaver Daycare Centres. Use the high-low method to estimate the function for any mixed costs. C. Use the cost function to estimate July expenses based on a projection of 940 children. D. List as many reasons as you can why management of the Little Beaver Daycare Centres cannot know with certainty what the expenses will be during July. E. Describe the pros and cons of using your cost estimate from Part (C) to decide whether to raise daycare fees