Question

You have been appointed the new management accountant for the Hilton Garden Inn which is a 153 room three star hotel opposite Stadium. Your first job is to do an analysis of future labor expense - which is the largest expense category for the hotel. Below is the data for the hotel labor expenses and hotel occupancy rate (room nights – total number of rooms occupied for the month) for the past 11 months: Month Occupancy Rate (x) Hotel Labor Expense (y) January 2015 4000 $55,000 February 2015 3550 $51,000 March 2015 3600 $52,000 April 2015 3200 $48,000 May 2015 No Data No Data June 2014 3902 $55,000 July 2014 3800 $53,000 August 2014 3900 $47,000 September 2014 4100 $55,000 October 2014 4132 $57,000 November 2014 4000 $54,000 December 2014 4269 $59,000 The hotel sales office noticed an increase in the number of summer festivals in the area in July and August so they estimate hotel monthly occupancy (room nights) for June, July and August to be: Month Expected Occupancy June 3900 July 4000 August 4100 1. Using the high-low method you estimate a cost equation for predicting labor expenses based on occupancy rates. What equation do you get?

Answer 1

High low activity
			occupancy	Cost
High-Dec			4269	59000
Low -April		3200	48000
Change			1069	11000
Variable cost per room night = Change in cost / Change in Room nights
		11000 /1069 = 10.29 per room night
Total Cost of Dec		59000
Less: variable cost (4269*10.29)	43928
Fixed cost			15072
Cost equation = 15072 + 10.29X
Estimated cost
			June	July	Aug
Room nights		3900	4000	4100
Variable cost @10.29	40131	41160	42189
Fixed cost			15072	15072	15072
Total Estimated cost		55203	56232	57261