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 out 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 3,250 $9,660
February 3,470 $10,185
March 3,660 $10,360
April 1,760 $6,160
May 1,350 $4,725
June 4,350 $11,575
July 3,280 $9,765
August 1,610 $5,635
September 700 $2,450
October 1,300 $4,550
November 1,640 $5,740
December 2,220 $7,770
Required:
1. Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day.
2. What other factors other than occupacy-days are likely to affect the variation in electrical costs from month to month?

Answer 1

1) Variable cost = $2.5

Fixed cost per month = $700

2) Factors like location, weather conditions, nature of clients, number of equipments used are other factors other than occupacy-days that are likely to affect the variation in electrical costs from month to month.

Step-by-step explanation:

1) Find the fixed cost and variable cost using high-low method.

For the occupancy days electric cost, let's check for the high & low activity level, i.e months with the highest and lowest costs.

High activity level = June 4,350 $11,575

Low activity level = September 700 $2,450

Change = high - low

= 3650 (4350 - 700), $9125 ($11,575 - $2450)

Change = 3650, $9125

It means that Change in cost = $9125

Also, Change in activity = 3650

For variable cost, we'll use the formula:

Variable cost = change in cost / change in activity

= $9125 / 3650

= $2.5

Variable cost = $2.5

For fixed cost:

Fixed cost = Total cost - variable cost element

= 11575 - (2.5 * 4350)

= 11575 - 10875

= $700

Fixed cost per month = $700

2) Factors like location, weather conditions, nature of clients, number of equipments used are other factors other than occupacy-days that are likely to affect the variation in electrical costs from month to month.