Exercise 6A-1 High-Low Method [LO6-10] The Cheyenne Hotel in Big Sky, Montana, h

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 ical Costs January February Karch April May June July August September October Novenber December 3,410 3,250 4,470 1,940 1,050 450 3,270 4,510 1,350 1,640 1,860 2,970 13, 889 $13,008 $15, 158 s 8,342 s 4,515 1,935 $13,094 $15,333 5,805 7,052 $ 7,998 $12,578 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.) Variable cost of electricity Fixed cost of electricity per occupancy-day per month

Explanation / Answer

Answer to Question 1.

As per High-Low Method,
Variable Cost per Unit = (y2 – y1) / (x2 – x1)

Total Cost at Highest Level of Activity (y2) = $15,333
Total Cost at Lowest Level of Activity (y1) = $1,935
Units at Highest Level of Activity (x2) = 4,510
Units at Lowest Level of Activity (x1) = 450

Variable Cost per Unit = (15,333 – 1,935) / (4,510 – 450)
Variable Cost per Unit = 13,398 / 4,060
Variable Cost per Unit = $3.30

Therefore, Variable Cost of Electricity is $3.30 per Occupancy day.

Total = a + bx
Total Cost at Highest Level of Activity = $15,333

$15,333 = a + ($3.30 * 4,510)
$15,333 = a + $14,883
a = $450

Therefore, Fixed Cost of Electricity is $450 per month.

Answer to Question 2.

The other factors which can affect the variation in Electrical cost from month to month are:
- Systematic factors like guests, switching off fans and lights
- Number of days present in a month
- Seasonal factors like winter or summer.

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