Question

EXERCISE 2-14 High-Low Method; Predicting Cost [LO 2-4, LO 2-51 The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over th months were: Guest-Days of Occupancy 4.000 6,500 8,000 10,500 12,000 9,000 7,500 Custodial Supplies Expense $7,500 $8.250 $10,500 $12,000 $13,500 $10,750 $9,750 Month March April... May June. . . July August . 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. Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis csimated the total fixed costs to be $3,973.10 per month and the variable cost to be 4. S0.77 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? 5.

1. Refer to Exercise 2-14 on page 55. Part 1 of 2. Using the formula format as shown on page 34 of the text, and using the High/Low Method, estimate a cost formula for custodial supplies expense for the Lakeshore Hotel.

2. Refer to Exercise 2-14, Part 2 of 2 on page 55. Using the cost formula derived in part one , the total amount of custodial supplies expense you would expect Lakeshore Hotel to incur at an occupancy level of 11,000 guest-days would be?

Answer 1

Req 1.
High Low method:			Activity	Supplies expenses
High activity-July			12000	13500
Low Activity-March			4000	7500
Change			8000	6000
Variable cost per day = Change in Supplies expenses / Change in activity
			6000 /8000 = 0.75 per day
Fixed cost:
Total cost of High activity			13500
Less: Variable cost (12000*0.75)			9000
Fixed cost:			4500
Cost formula:
C (X) = 4500+ 0.75X
Where C = Supplies expenses and X = Number of days
Req 2.
Custodial Supplies expense for 11000 Guest days:
Fixed cost				4500
Add: Variable cost (11000 days @ 0.75)				8250
Total cost for 11000 days				12750