Question

he 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 3,240 $ 8,622 February 3,060 $ 8,228 March 1,150 $ 3,910 April 2,260 $ 7,684 May 4,310 $ 10,984 June 1,270 $ 4,318 July 3,410 $ 9,418 August 640 $ 2,176 September 1,310 $ 4,454 October 3,760 $ 9,738 November 1,330 $ 4,522 December 2,570 $ 7,868 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 decimal places and Fixed cost element answer to nearest whole dollar amount.)

Answer 1

Fixed costs= $640

Variable cost per unit= $2.4

Step-by-step explanation:

Giving the following information:

Month Occupancy-Days Electrical Costs

January 3,240 $ 8,622

February 3,060 $ 8,228

March 1,150 $ 3,910

April 2,260 $ 7,684

May 4,310 $ 10,984

June 1,270 $ 4,318

July 3,410 $ 9,418

August 640 $ 2,176

September 1,310 $ 4,454

October 3,760 $ 9,738

November 1,330 $ 4,522

December 2,570 $ 7,868

To calculate the unitary variable cost and the fixed cost under the high-low method, 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= (10,984 - 2,176) / (4,310 - 640)

Variable cost per unit= $2.4

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

Fixed costs= 10,984 - (2.4*4,310)

Fixed costs= $640

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

Fixed costs= 2,176 - (2.4*640)

Fixed costs= $640