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 out 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 3,250 $ 9,660 February 3,470 $ 10,185 March 3,660 $ 10,360 April 1,760 $ 6,160 May 1,350 $ 4,725 June 4,350 $ 11,575 July 3,280 $ 9,765 August 1,610 $ 5,635 September 700 $ 2,450 October 1,300 $ 4,550 November 1,640 $ 5,740 December 2,220 $ 7,770 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 other than 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.)

Number of days present in a month.

Income taxes paid on hotel income.

Seasonal factors like winter or summer.

Systematic factors like guests, switching off fans and lights.

Answer 1

Ans:

1. Calculation of Fixed and Variable cost of Electricity:(using High low Method)

Variable Cost = (Cost at High Level - Cost at Low Level) / (Occupancy at High Level - Occupancy at Low level)

Given, Cost at High Level = In June $11,575 Occupancy 4,350, Cost at Low level = September $2,450 Occupancy 700

VC = ($11,575 - $2,450) / (4,350 - 700) = $2.5

Variable cost Per occupancy Day = $2.5

Fixed cost = Total cost – Variable cost

Use June Month data for calculation of fixed cost

Fixed Cost = $11,575 - $2.5 x 4350 = $700

Fixed Cost = $700

2. Systematic Factors like guests, switching off fans and lights.

Because single person can use less electricity compared to family

Seasonal Factors like winter and summer.

Because in winter more consumption of Air conditioner and in winter more consumption due to geysers, heaters etc

These are the factors which can affect the cost of electricity apart from occupancy days.