Question

Please answer all parts and show all work.

The following data have been gathered by the owner of the Crestview Motel, in order to better understand the costs of op Wages for desk clerks amount to $18,400/month. Base charge for utilities is $3,340/month. An additional $1.80/night is incurred on average for each occupied room. Fixed costs for taxes, insurance, advertising, etc. amount to $3,400/month. The complimentary breakfast provided to guests costs on average $3.20 per occupied room. Data regarding housekeeping costs for the last nine months are given below. Cost (9) 8,370 7,990 10,290 9,120 6,870 9,345 7,470 10,150 9,390 Rooms occupied 940 880 1,120 1,000 740 1,070 800 1,150 950 a) Using the hi-lo method, develop an equation for the behavior of housekeeping costs, in the form Y = a +bX b) Develop an equation for total costs of operation, in the form Y a +bX c) Using your equation, forecast total operating cost if 1,250 rooms are occupied d) Why might your answer to part e be unreliable? e) What is the marginal cost of an occupied room? How might this information be of use to the owner?

Answer 1

Answer (a)

Using high low method:

High Value Low Value Difference Rooms Occupied Costs ($) 1150 $10,150 740 $6,870 410 $3,280

House keeping variable cost per occupied room = 3280 / 410 = $8 per occupied room

House keeping fixed cost per month = 10150 - 1150 * 8 = $950

Cost equation is:

House keeping cost = $950 + $8 * Number of rooms occupied

Answer (b):

Variable costs per occupied room = variable house keeping cost + variable utilities charges + breakfast cost

= $8 + $1.80 + $3.20

= $13

Fixed costs per month = Fixed house keeping costs + Wages + Fixed utilities cost + Fixed cost for tax, insurance, advertising etc

= $950 + 18400 + 3340 + 3400

= $26,090

Cost equation is:

Total cost of operation = $26,090 + $13 * Number of rooms occupied

Answer (c):

Total cost of operation = $26,090 + $13 * Number of rooms occupied = 26090 + 13 * 1250 = $42,340

Total cost of operation if 1250 rooms are occupied = $42,340

Answer (d):

The cost estimate may be unreliable since it is based variable and fixed house keeping cost estimates based on high low method which calculates fixed and variable costs based on two sets of data.

Answer (e):

Marginal cost of occupied room = Variable cost = $13

Marginal cost of occupied room = $13

It is useful for owner for decision making. For example, if there are unoccupied rooms, the owner can get guests by offering discounts and earn additional contribution. The variable cost sets the minimum rate per night per room.