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.

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	3,400		$	10,234
February	3,280		$	10,052
March	4,370		$	11,605
April	1,950		$	6,825
May	680		$	2,380
June	1,960		$	6,860
July	4,040		$	11,060
August	4,080		$	11,100
September	2,240		$	7,602
October	1,030		$	3,605
November	1,460		$	4,634
December	2,700		$	8,974

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?

 

Explanation

1.

	Occupancy-Days				Electrical Costs
High activity level (March)		4,370				$	11,605
Low activity level (May)		680					2,380
Change		3,690				$	9,225

Variable cost	=	Change in cost ÷ Change in activity
	=	$9,225 ÷ 3,690 occupancy-days
	=	$2.50 per occupancy-day

Total cost (March)	$	11,605
Variable cost element
($2.50 per occupancy-day × 4,370 occupancy-days)		10,925
Fixed cost element	$	680

2.

Electrical costs may reflect seasonal factors other than just the variation in occupancy days. For example, common areas such as the reception area must be lighted for longer periods during the winter than in the summer. This will result in seasonal fluctuations in the fixed electrical costs.

Additionally, fixed costs will be affected by the number of days in a month. In other words, costs like the costs of lighting common areas are variable with respect to the number of days in the month, but are fixed with respect to how many rooms are occupied during the month.

Other, less systematic, factors may also affect electrical costs such as the frugality of individual guests. Some guests will turn off lights when they leave a room. Others will not.

Thanks