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 540 $ 1,620 February 3,810 $ 8,352 March 4,100 $ 8,736 April 1,730 $ 5,190 May 3,520 $ 7,968 June 1,320 $ 3,960 July 3,420 $ 7,668 August 4,120 $ 8,780 September 1,610 $ 4,830 October 830 $ 2,490 November 1,420 $ 4,260 December 2,320 $ 6,960 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 d

Answer 1

Answer:

Variable cost= $2 per occupancy day

Fixed costs= $540

Explanation:

Giving the following information:

Month Occupancy-Days Electrical Costs

January 540 $ 1,620

February 3,810 $ 8,352

March 4,100 $ 8,736

April 1,730 $ 5,190

May 3,520 $ 7,968

June 1,320 $ 3,960

July 3,420 $ 7,668

August 4,120 $ 8,780

September 1,610 $ 4,830

October 830 $ 2,490

November 1,420 $ 4,260

December 2,320 $ 6,960

First, we need to calculate the variable cost per occupancy day:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (8,780 - 1,620) / (4,120 - 540)= $2 per occupancy day

Now, we can calculate the fixed costs:

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 8,780 - (2*4,120)= $540

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 1,620 - (2*540)= $540