The following problem is an example of MIXED COSTS : This costs contains both variable and fixed components. Also known semivariables. The linear equation Y = A + BX (page 38 in the book) show the exhibit 25 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 occupancyday 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 
Occupancydays 
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
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.
Month  2017 
Occupancy days 
Electrical costs 
Jan 2017 
3,500 
$ ? 
Feb 
4,050 
? 
March 
4,800 
? 
April 
2,500 
? 
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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