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 1,736 $4,127
February 1,904 $4,207
March 2,356 $5,083
April 960 $2,857
May 360 $1,871
June 744 $2,696
July 2,108 $4,670
August 2,406 $5,148
September 840 $2,691
October 124 $1,588
November 720 $2,454
December 1,364 $3,529

Required:
a. Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day.
b. What other factors other than occupancy-days are likely to affect the variation in electrical costs from month to month?

Answer 1

Total cost= 1,395 + 1.56x

x= number of units of activity

Step-by-step explanation:

To calculate the unitary and fixed costs, we need to use the following formulas:

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

Variable cost per unit= (5,148 - 1,588) / (2,406 - 124)

Variable cost per unit= $1.56

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

Fixed costs= 5,148 - (1.56*2,406)

Fixed costs= $1,395

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

Fixed costs= 1,588 - (1.56*124)

Fixed costs= $1,395

The total cost is given by:

Total cost= 1,395 + 1.56x

x= number of units of activity

The electrical costs can vary with the season. In summer a higher electricity use is required to cool down the rooms and, some artifacts such as freezers and refrigerators usage increase. In winter the days are shorter, artificial lighting increases.