Question

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hote and the number of occupancy-days over the last year. An occupancy-day represents a room rented out 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 3,180 2,920 3,780 2,160 650 2,050 4,050 4,070 1,780 570 1,580 2,680 Electrical Costs $6,510 $6,261 $7,392 $5,569 $1,820 $5,261 $7,829 $7,896 $4,984 $1,596 $4,424 $5,908 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) Electrical Occupancy Days Costs High activity level Low activity level Change Variable cost per occupancy-day Fixed cost element

Answer 1

1. Estimation of the fixed cost of electricity per month & the variable cost of electricity per occupancy-day, using High-Low method -

Occupancy Electrical days costs 4070 7896 High activity level Low activity level change 570 1596 3500 6300

variable cost per occupancy day = change in cost/change in occupancy days

= 6300/3500

= 1.8

Fixed cost = Total cost at high/low level of activity - variable cost per occupancy rate*high/low level of activity

= 7896 - 1.8*4070

= 7896 - 7326

= 570

2. Factors other than occupancy days are likely to affect the variation in electrical costs from month to month are -

1. seasonal factors like winter or summer

2. systematic factors like guest, switching off fans and lights

3. Number of days present in a month

Please check with your answer and let me know.