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 January February March April May June July August September October November December Occupancy-Days 3,400 4,150 3,080 2,230 1,570 1,910 3,880 3,830 2,060 1,940 1,050 2,710 Electrical Costs $ 9,536 $ 10, 180 $ 9,184 $ 7,136 $ 5,024 $ 6,112 $ 9,997 $ 9,904 $ 6,592 $ 6,208 $ 3,360 $ 8,168

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.)

2. What other factors in addition to occupancy-days are likely to affect the variation in electrical costs from month to month? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

Answer 1

1. VARIABLE COST PER UNIT = Highest Activity Cost - Lowest Activity Cost / Highest Activity Units - Lowest Activity Units

    = $10,180 - $3,360 / 4150 - 1050

= $2.2 per occupancy days

FIXED COST PER MONTH = Highest Activity Cost - Variable Cost per unit * Highest activity unit

= $10,180 - ($2.2 * 4150)

= $1050 per month

2. FACTORS

• Systematic factors like guests, switching off fans and lights
• Number of days present in a month
• Seasonal factors like Winter or Summer