Question

Exercise 6A-1 High-Low Method [LO6-10] 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 Occupancy-Days Electrical Costs January 1,736 $ 4,127 February 1,904 $ 4,207 March 2,356 $ 5,083 April 960 $ 2,857 May 360 $ 1,871 June 744 $ 2,696 July 2,108 $ 4,670 August 2,406 $ 5,148 September 840 $ 2,691 October 124 $ 1,588 November 720 $ 2,454 December 1,364 $ 3,529 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 in addition to occupancy-days are likely to affect the variation in electrical costs from month to month

Answer 1

Answer:

1) variable cost = $1.56 per day

fixed costs = $1,395 per month

2) another aspect that increases or decreases electrical consumption is the weather. During very hot days, more people use the air conditioner, which increases electricity costs. Very cold weather will result in a similar increase in electric consumption.

Explanation:

Month Occupancy-Days Electrical Costs

January 1,736 $ 4,127

February 1,904 $ 4,207

March 2,356 $ 5,083

April 960 $ 2,857

May 360 $ 1,871

June 744 $ 2,696

July 2,108 $ 4,670

August 2,406 $ 5,148

September 840 $ 2,691

October 124 $ 1,588

November 720 $ 2,454

December 1,364 $ 3,529

variable cost = (highest activity cost - lowest activity cost) / (highest activity level - lowest activity level) = ($5,148 - $1,588) / (2,406 - 124) = $1.56 per day

fixed costs = $5,148 - ($1.56 x 2,406) = $1,395