Question

Exercise 6A-1 High-Low Method [LO6-10]

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	1,736		$	4,127
February	1,904		$	4,207
March	2,356		$	5,083
April	960		$	2,857
May	360		$	1,871
June	744		$	2,696
July	2,108		$	4,670
August	2,406		$	5,148
September	840		$	2,691
October	124		$	1,588
November	720		$	2,454
December	1,364		$	3,529

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.)

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.)

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

Answer 1

1.

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

= (5,148-1,588)/(2,406-124)

= 3,560/2,282

= $1.56 per occupancy day

Fixed cost = Highest activity cost - Highest activity x Variable cost per occupancy day

= 5,148- 2,406 x 1.56

= 5,148-3,753

= $1,395

2.

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

• Seasonal factors like winter or summer.unanswered
• Systematic factors like guests, switching off fans and lights.unanswered
• Number of days present in a month.unanswered

Kindly comment if you need further assistance.

Thanks‼!