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 July August September October November December Occupancy-Days 2,710 3,600 860 2,170 4,200 1,530 4,110 4,060 1,980 1,160 1,210 2,480 Electrical Costs $ 5,270 $ 6, 205 $ 2,150 $ 4,350 $ 7,160 $ 3,825 $ 7,050 $ 6,925 $ 4,090 $ 2,900 $ 3,025 $ 4,910 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

1.

Variable cost per unit = (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)

= (7,160-2,150)/(4,200-860)

= 5,010/3,340

= $1.5 per occupancy day

Fixed cost = Highest activity cost - Highest activity x Variable cost per occupancy day

= 7,160 - 4,200 x 1.5

= $860

Variable cost of electricity	$1.5	per occupancy-day
Fixed cost of electricity	$860	per month

2.

Following factors in addition to occupancy-days are likely to effect the variation in electrical costs from month to month:

(i) Systematic factors like guests, switching off fans and lights.

(ii) Number of days presents in a month.

(iii) Seasonal factors like winter or summer.

Kindly comment if you need further assistance.

Thanks‼!