Question

Homework EXERCISE 2-14 High-Low Method; Predicting Cost The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the last seven months were: Month March April May June July August September 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 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 vertical 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? 5. Using the least-squares regression estimates given in requirement 4 what custodial supplies expenso would you expect to be incurred at an occupancy level of 11,000 guest-days? F MacBook Pro

Answer 1

High Low Method Difference in Custodial Supplies Expense Difference In Guest Days of Occupancy 13500 - 7500 12000-4000 6,000 8,000 Variable Cost component 0.75 Per Guest Days of Occupancy Determine the fixed cost component using the high-low method Number of Guest Days of Occupancy Total Cutodial Supplies expense Less Variable component (12000*.75) Fixed component 12,000 13,500 9,000 4,500 4,000 7,500 3,000 (4000*.75) 4,500 Cost Formula = $4,500 +.75 * No. of Guest days of occupancy Total Cost = 4500 +.75 *11000 Total Cost = 12750

Number of Guest Days of Occupancy Cutodial Supplies expense 4000 6500 8000 10500 12000 9000 7500 7500 8250 10500 12000 13500 10750 9750 Cutodial Supplies expense 16000 14000 12000 10000 8000 Cutodial Supplies expense Predicted Cutodial Supplies Number of Guest Days of Occupancy Line expense 5000 10000 Fit Blot Number of Guest Days of Occupancy

91 4) The estimate of fixed cost under high low method is $526.90 (4500 - 3973.10) higher than the estimate provided by least square method. The estimate of Variable cost per Guest Days of Occupancy is $.02 (.77-.75) lower than the estimate provided by least square method. A straight line that minimized the sum of the squared errors would intersect the Y - axis at $3973.10, instead of $4,500. The seond reason for flatter slope is that the estimated variable cost per unit is higher than the high low method. 95 97 5) Cost Formula $3973.10 +.77 * No. of Guest days of occupancy Total Cost = 3973.10 +.77 *11000 Total Cost = 12443.10 104