Question

Exercise 5A-1 High-Low Method [LO5-10]

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	3,560		$	6,573
February	3,420		$	6,209
March	4,120		$	7,022
April	1,990		$	5,174
May	430		$	1,118
June	1,750		$	4,550
July	3,690		$	6,687
August	3,970		$	6,968
September	1,950		$	5,070
October	1,450		$	3,770
November	2,050		$	5,330
December	2,300		$	5,980

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.)

Systematic factors like guests, switching off fans and lights.unanswered

Number of days present in a month.unanswered

Income taxes paid on hotel income.unanswered

Seasonal factors like winter or summer.unanswered

Fixed salary paid to hotel receptionist.

Answer 1

1)

	cost	occupancy days (activity)
Highest activity	7022	4120
Lowest activity	1118	430
change	5904	3690

Variable cost per occupacy days =change in cost /change in occupancy days

                 = 5904 / 3690

                 = $ 1.6 per occupancy days

Fixed cost at highest activity level =Total cost- Variable cost

              = 7022- [4120*1.6]

               = 7022- 6592

                = $ 430

2)correct option is "

a)Systematic factors like guests, switching off fans and lights.unanswered

b)Number of days present in a month.unanswered

c)Seasonal factors like winter or summer.unanswered