EXERCISE 2-5High-Low Method [L02-5] The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the hotel’s business is highly seasonal, with peaks occurring during the ski season and in the summer. of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The Month Occupancy-Days Electrical Costs 1,736 1,904 2,356 960 360 744 2,108 2,406 840 124 720 1,364 $4,127 $4,207 $5,083 $2,857 $1,871 $2,696 $4,670 $5,148 $2,691 $1,588 .. $2,454 $3,529 February… April May June uly . August . September October . November . December 1. Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day. Round off the fixed cost to the nearest whole dollar and the variable cost to the nearest whole cent. 2. What other factors other than occupancy-days are likely to affect the variation in electrical costs from month to month?
Answer 1 :- Variable cost under high low method = ( Cost at highest level of activity – Cost at lowest level of activity ) / ( highest level of activity – lowest level of activity )
( 5148 – 1588 ) / ( 2406 – 124 ) [ highest level of activity is of august since it has highest occupancy days and lowest level of activity is of october since it has lowest occupancy days ]
3560 / 2282 = $ 1.56 per occupancy day
Fixed cost= 5148 – 1.56 * 2406 = $ 1395
Seasonal factors like winter or summer and systematic factors like guests switching off lights and fans