Question

A hotel wishes is to analyze its electricity cost and its rooms department in terms of fixed and variable elements. Monthly income statements show that during its busiest and slowest months, cost and rooms occupied information is as follows:

--------> room cost rooms sold

busiest $4,080 2,800

slowest 3,100 1,400

P7.8 A hotel wishes to ar terms of fixed and va that during its busiest shes to analyze its electricity cost in its rooms department in ved and variable elements. Monthly income statements show ng its busiest and slowest months, cost and rooms occupied in- formation is as follows: Rooms Cost Busiest Slowest $4,080 3,100 Rooms Sold 2,800 1,400 Use the high-low method to calculate the following: a. Variable cost per room occupied b. Total variable cost for the busiest and the slowest month C. Total fixed cost per month

Answer 1

Answer to Part a.

As per High- Low method,
Variable Cost per Unit = (y2 – y1) / (x2 – x1)
Total Cost at Highest level of activity (y2) = $4,080
Total Cost at Lowest level of activity (y1) = $3,100
Units at Highest level of activity (x2) = 2,800
Units at Lowest level of activity (x1) = 1,400

Variable Cost per room occupied = ($4,080 - $3,100) / (2,800 – 1,400)
Variable Cost per room occupied = $980 / 1,400
Variable Cost per room occupied = $0.70

Answer to Part b.

Total Variable Cost for Busiest month = $0.70 * 2,800
Total Variable Cost for Busiest month = $1,960

Total Variable Cost for Slowest month = $0.70 * 1,400
Total Variable Cost for Slowest month = $980

Answer to Part c.

Total Cost for 2,800 rooms occupied = $4,080

Total Cost = Fixed Cost + Variable Cost
$4,080 = Fixed Cost + ($0.70 * 2,800)
$4,080 = Fixed Cost + $1,960
Fixed Cost = $2,120

Therefore, Fixed Cost per month is $2,120