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 light

Answer 1

Answer and Explanation:

The computation of the fixed cost and the variable cost of electricity per occupancy-day by using high low method is shown below:

The Variable cost of electricity per occupancy-day = (High electrical  cost - low electrical cost) ÷ (High month occupancy days - low month occupancy days)

= ($11,575 - $2,450) ÷ (4,350 - 700)

= $9,125 ÷ 3,650

= $2.50 per occupancy days

Now the fixed cost equal to

= High electrical cost - (High month occupancy days × Variable cost per occupancy days)

= $11,575 - (4,350  × $2.50)

= $11,575 - $10,875

= $700

The other factors other than the occupancy days affect the variation in electrical costs from month to month is the number of days present in a month as it remains fixed with respect to the occupancy , seasonal factors like winter or summer as in the summer the electrical cost is high as compared in the winter season , and the Systematic factors like guests, switching off fans and light  depend on their wish or as per usage.