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?
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with the question mark to produce a check mark for a correct answer
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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:
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