Question

The following problem is an example of MIXED COSTS : This costs contains both variable and fixed components. Also known semi-variables. The linear equation Y = A + BX (page 38 in the book) show the exhibit 2-5 help the manager to separate each cost in fixed and variable.

1. The WESTERN HOTEL has accumulated records of the total electrical costs of the hotel and number of occupancy – days over the last year. An occupancy-day represents a room rented out for one day. The hotel’s business is highly seasonal, with peaks occurring during the ski season and in the summer.

Month - 2016	Occupancy-days	Electrical costs
Jan	2,604	$ 6,257
Feb	2,856	6,550
March	3,534	7,986
April	1,440	4,022
May	540	2,289
June	1,116	3,591
July	3,162	7,264
Aug	3,608	8,111
Sep	1,260	?
Oct	1,186	?
Nov	1,080	?
Dec	2,046	?

REQUIRED

1. Using the HIGH-LOW METHOD, estimate the FIXED COSTS of electricity per month and the VARIABLE COST of electricity per occupancy-day from September to December.

HINT: The cost driver is Occupancy days (which causes the cost to occur) Determine the regression formula to be able to project costs from September to December and then the first 4 months of next year.

                

Cost Driver	Occupancy days	Electrical costs
High activity level ( cost driver)	3,608	$ 8,111
Low activity level ( cost driver)	540	2,289
Change	3,068	$ 5,822

            A: Variable Cost Element = Change in Cost $        =   5,822 / 3,068 = 1.90 per day op

                                                             change of activity

           B Fixed Cost Element = Total cost – Variable cost element

                                                 $ 8,111 – ( 1.90 x 3,608 Occup days)

                                                     8.111 – 6,855 = 1,256 , fixed cost

             Then the equation is : Y = A + BX

                                                Y = 1,256 + 1.90(X)

             Note: To complete the projections from September to December, all you have to do is replace the X with the COST DRIVER OF EACH MONTH and you get the cost for each month of electricity and you can project the months of next year.

2. Using the cost formula and projected the electrical costs for the followings months: year 2017

                

Month - 2017	Occupancy days	Electrical costs
Jan 2017	3,500	$ ?
Feb	4,050	?
March	4,800	?
April	2,500	?

Answer 1

Cost Formula : Y = 1,256 + 1.90(X) :

For Jan - 2017 :

Number of Occupancy Days = 3,500

Therefore, Electrical Cost (Y) = 1,256 + 1.90 x (3,500) = 1,256 + 6,650 = $7,906

For Feb - 2017 :

Number of Occupancy Days : 4,050

Therefore, Electrical Cost (Y) = 1,256 + 1.90 x (4,050) = 1,256 + 7,695 = $8,951

For Mar - 2017 :

Number of Occupancy Days : 4,800

Therefore, Electrical Cost (Y) = 1,256 + 1.90 x (4,800) = 1,256 + 9,120 = $10,376

For Apr - 2017 :

Number of Occupancy Days : 2,500

Therefore, Electrical Cost (Y) = 1,256 + 1.90 x (2,500) = 1,256 + 4,750 = $6,006

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