Question

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 January February March April May June July August September October November December Occupancy-Days 3,240 3.060 1,150 2.260 4,310 1,270 3.410 640 1.310 3,760 1.330 2,570 Electrical Costs $ 8,622 $ 8.228 $ 3,910 $ 7,684 $10,984 $ 4.318 $ 9.418 $ 2.176 $ 4,454 $9.739 $ 4.522 7.868 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.) Variable cost of electricity Fixed cost of electricity per occupancy-day per month

Answer 1

	Occupancy-Days	Electrical Costs
High level of activity [ May ]	4310	10984
(-) Low level of activity [ August ]	640	2176
Difference	3670	8808

Variable cost of electricity = Difference in electrical costs / Difference in occupancy days = 8808 / 3670

2.40

per occupancy-day

Now let us calculate fixed cost of electricity using the data of high level of activity
Total electricity costs = ( Variable cost of electricity per occupancy day * Occupancy days ) + Fixed cost of electricity
10984 = ( 2.40 * 4310 ) + Fixed cost of electricity
10984 = 10344 + Fixed cost of electricity
Fixed cost of electricity = 10984 - 10344	640	per month