Question

NISE 3-5 High-Low Method; Predicting Cost [L01. L031 ashore Hotel's guest-days of occupancy and custodial supplies expense over the last seven The Lakeshore Hotel's months were: Month Guest-Days of Occupancy Custodial Supplies Expense March April May ..... June ... July August .. September ..... 4,000 6,500 8,000 10,500 12,000 9,000 $7,500 $8,250 $10,500 $12,000 $13,500 $10,750 $9,750 7,500 Guest-days is a measure of the overall activity at the hotel. For example, a guest who stays at the hotel for three days is counted as three guest-days. Required: 1. Using the high-low method, estimate a cost formula for custodial supplies expense. 2. Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days? 3. Prepare a scattergraph using the data given above. Plot custodial supplies expense on the ver- tical axis and the number of guest-days occupied on the horizontal axis. Draw a straight line through the two data points that correspond to the high and low levels of activity. Make sure your line intersects the Y-axis. 4. Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis estimated the total fixed costs to be $3,973.10 per month and the variable cost to be $0.77 per guest-day. How would the straight line that you drew in requirement 3 differ from a straight line that minimizes the sum of the squared errors? Using the least-squares regression estimates given in requirement 4, what custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days?

Answer 1

1) Total custodial supplies expense = $0.75 per occupancy variable cost + $4500 Fixed Cost (Refer note 1)

2) Total Custodial supplies expense for 11000 guest = $12,750 ($.75 *11000 + 4500)

5) Least squares regression estimates = Y=a+bx (Y= total cost ; a= fixed cost ; b= variable cost per unit ; x= occupancy/units)

Total cost= $3973.10 (given as fixed cost) + $0.77 (per guest day- given as variable cost)* 11000( guest days given)

=$12443.10

3)

Custodial expense 16000 13500 12000 14000 12000 10000 8000 971950d0750 7500 8250. Custodial expenses 60004500 4000 2000 O 0 2000 4000 10000 12000 14000 6000 8000 Guest days

4) Regression analysis is a better method as it estimates costs using all the possibilities , it reflects the linear relationship between dependent variable Y and independent variable X with intercepts a and b. Therefore, unlike high low method that was unable to consider the option of 6500 guest days with a custodial cost of $8250 (clearly visible from the above scattergraph) , below regression graph takes it into consideration.

14000 13213.1 12058.1 10903.1 12000 10000 8978 9746173.1 8000 7053.1 Custodial expense 6000 3973.1 4000 2000 0 2000 4000 10000 12000 14000 6000 8000 Guest days

Note 1-

HIGH LOW METHOD
Variable cost per guest days=	(Highest custodial expense- Lowest custodial expense)/ Highest guest days- lowest guest days
	Custodial expense ($)	Guest days
Highest	13500	12000
Lowest	7500	4000
Difference	6000	8000
Variable cost per guest day	6000/8000 =$.75
Total Variable cost for 12000 guest days	12000*.075=$9000

Total cost for 12000 guest days	$ 13,500.00
Less: Total variable cost for 12000 guest days	$   9,000.00
Total Fixed cost	$   4,500.00