Answer: check explanation.
Step-by-step explanation:
Complete question; The Lakeshore Hotel’s guest-days of occupancy and custodial supplies expense over the last seven months were:
(Check attached file/picture for the table).
Guest-days is a measure of the overall activity at the hotel. For example, a guest who stays at the hotel for three days is counted as three guest-days.
Required:
1. Using the high-low method, estimate a cost formula for custodial supplies expense.
2. Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days?.
STEP BY STEP SOLUTION:
(1).
STEP ONE: look for the high and the low activity level. From the table we can see that;
High activity level is for the month of July, having guest-days of occupancy of 12,000 and custodial supplies expense of $13,500.
The low activity level is for the month of March with guest-days of occupancy of 4,00 and custodial supplies expense of $7500.
The difference between high and low activity custodial supplies expense is called change in activity and it is equal to 8,000(13500-75000).
The difference between high and low activity level guest-days of occupancy is called change in cost and it is equal to $6000(12,000-4000).
Step one: calculate the variable cost.
Variable cost= Change in cost/ change in activity. ---------------------(1).
Variable cost= 6000/8000= $0.75.
Step two: CALCULATE the fixed cost.
Fixed cost = Total cost - variable cost elements. -------------------(2).
Fixed cost = 13500- (.75 × 12000).
Fixed cost = $4500.
Step three: calculate the total cost.
From the second equation, we can get the total cost.
Total cost= fixed cost + ( variable cost × number of guest-days occupancy). --------------------------(3).
This is the solution for the first question.
(2). For the solution to question 2, we will use the equation (3).
Total cost= fixed cost + ( variable cost × number of guest-days occupancy).
Total cost= $4500 + (.75 × 11000).
Total cost = $4500 + 8250.
Total cost= $12750.