Question

# Exercise 6A-1 High-Low Method [LO6-10] The Cheyenne Hotel in Big Sky, Montana, has accumulated records of...

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 3,290 \$ 16,450 February 3,160 \$ 15,800 March 1,800 \$ 9,000 April 4,430 \$ 18,500 May 970 \$ 4,850 June 1,650 \$ 8,250 July 4,150 \$ 18,020 August 4,160 \$ 18,070 September 2,050 \$ 10,250 October 1,110 \$ 5,550 November 780 \$ 3,900 December 2,810 \$ 14,050

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.)

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

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

= (18,500 - 3,900)/(4,430 - 780)

= 14,600/3,650

= \$4 per  occupancy-day

Fixed cost = Highest activity cost - (Highest activity x Variable cost per hour)

= 18,500 - (4,430 x 4)

= 18,500 - 17,720

= \$780 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.