Question

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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? (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. Any boxes left with a question mark will be automatically graded as incorrect.) Seasonal factors like winter or summer. unchecked Systematic factors like guests, switching off fans and lights. unchecked Number of days present in a month. unchecked Fixed salary paid to hotel receptionist. unchecked Income taxes paid on hotel income. unchecked

Answer 1

Solution:-

1. Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day:-

Fixed cost	1,395	Per month
Variable cost	1.56	Per occupancy day

Explanation:-

	Occupancy days	Electricial cost
High activity level (august)	2,406	5,148
Low level activity (October)	124	1,588
Change	2,282	3,560

Variable cost= Change in cost ÷ Change in activity

= $3,560 ÷ 2,282 occupancy-days

= 1.56 per occupancy-day

Total cost (august)	5,148
Variable cost element ($1.56 per occupancy-day × 2,406 occupancy-days	3,753
Fixed cost element	1,395

2. What other factors in addition to occupancy-days are likely to affect the variation in electrical costs from month to month:-

Seasonal factors like winter or summer
Systematic factors like guests, switching off fans and lights
Number of days present in a month.
Fixed salary paid to hotel receptionist	?
Income taxes paid on hotel income	?