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	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. (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.)

Variable cost of electricity______per occupancy-day

Fixed cost of electricity________per month

2. What other factors in addition to occupancy-days are likely to affect the variation in electrical costs from month to month? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

• Systematic factors like guests, switching off fans and lights
• Number of days present in a month.
• Seasonal factors like winter or summer
• Fixed salary paid to hotel receptionist

Answer 1

1.

Variable cost of electricity per occupancy-day = (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)

= (11,575 - 2,450)/(4,350 - 700)

= 9,125/3,650

= $2.5

Fixed cost of electricity per month = Highest activity cost - (Highest activity x Variable cost of electricity per occupancy-day)

= 11,575 - (4,350 x 2.5)

= 11,575 - 10,875

= $700

Variable cost of electricity = $2.5 per occupancy-day

Fixed cost of electricity = $700 per month

2.

Following factors in addition to occupancy-days are likely to affect the variation in electrical costs from month to month

Systematic factors like guests, switching off fans and lights

Number of days present in a month.

Seasonal factors like winter or summer

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