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 out for one day. The hotel’s business is highly seasonal, with peaks occurring during the ski season and in the summer. 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)
Expert Answer
Solution: | ||||
Occupancy | Electrical | |||
Days | Costs | |||
High activity level | 2,406 | $5,148 | ||
Low activity level | 124 | $1,588 | ||
Change | 2,282 | $3,560 | ||
Variable Cost | $1.56 | per occupancy-day | ||
Fixed cost element | $1,395 | |||
Working Notes: | ||||
Occupancy | Electrical | |||
Days | Costs | |||
High activity level | 2,406 | $5,148 | ||
[August] | ||||
Low activity level | 124 | $1,588 | ||
[October ] | ||||
Change | 2,282 | $3,560 | ||
Variable Cost | $1.56 | per occupancy-day | ||
Fixed cost element | $1,395 | |||
Notes: | ||||
Variable cost = Change in cost / Change in activity | ||||
= $ 3,560/2,282 | ||||
= $ 1.56 per occupancy day | ||||
Fixed cost Element | ||||
Total Cost for August | $5,148 | |||
Less: | Variable cost | $3,753 | ||
[ ($ 3560/2,282) x 2,406 occupancy days ] | ||||
[ $ 1.56 x 2,406 ] | ||||
Fixed cost Element | $1,395 |