Question

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer. Month January February March April May June Occupancy-Days 3,300 2,960 3,550 1,600 1,370 1,350 3,490 3,750 1,390 1,060 1,520 2,900 Electrical Costs $ 8,024 $ 7,767 $ 8,265 $ 4,800 $ 4,110 $ 4,050 $ 8,117 $ 8,560 $ 4,170 $ 3,180 $ 4,560 $ 7,746 July August September October November December Required: 1. Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day. (Do not round your intermediate calculations. Round your Variable cost answer to 2 decimal places and Fixed cost element answer to nearest whole dollar amount.) Variable cost of electricity Fixed cost of electricity per occupancy-day per month

Answer 1

For calculating variable cost the difference between occupancy days and electricity cost at higher and lower points should be considered.

Variable cost of electricity = ($8,560 - $3,180) / (3,750 - 1,060) = $2 per occupancy day

Fixed cost is the difference between the total cost and variable cost.

At 3,750 occupancy days the total cost is $8,560.

Fixed cost = $8,560 - ($2 X 3,750) = $1,060