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	Occupancy-Days		Electrical Costs
January	3,000		$	15,000
February	850		$	4,250
March	4,430		$	18,570
April	1,470		$	7,350
May	3,650		$	18,250
June	1,120		$	5,600
July	3,910		$	17,425
August	3,840		$	17,288
September	1,900		$	9,500
October	1,090		$	5,450
November	2,040		$	10,200
December	2,990		$	14,950

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.)

Answer 1

High-Low method

Variable cost per unit = [Highest Activity cost - Lowest Activity cost] / [Highest activity units - Lowest activity units]

Highest Activity cost = $18,570,  Highest activity units = 4,430 Occupancy days

Lowest Activity cost = $4,250 ,  Lowest activity units = 850 Occupancy days

Variable cost per unit = [$18,570 - $4,250] / [4,430 - 850]

Variable cost per unit = $4 per Occupancy day

Fixed Cost = Total cost of any month - (Number of units in that month* variable cost per unit)

$18,570 - (4,430 * $4)

= $850

So, Fixed cost of Electricity per month = $850

Variable cost of Electricity per Occupancy day = $4.00