The Lakeshore Hotel\'s guest-days of occupancy and custodial supplies expense ov

Question

The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the last seven months were:

Month Guest-Days of Custodial Supplies
Occupancy Expense
March 2,800 $17,400
April 4,490 $22,500
May 5,040 $23,000
June 4,260 $19,900
July 7,070 $31,918
August 7,000 $27,600
Sept 3,000 $18,100

Guest-days is a measure of the overall activity at the hotel. For example, a guest who stays at the hotel for three days is counted as three guest-days.

1. Using the high-low method, estimate a cost formula for custodial supplies expense where X is the number of guest-days.

2. Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be incurred at an occupancy level of 4,610 guest-days?
a. variable cost
b. fixed cost
c. total cost

Explanation / Answer

1. high is July 7070, 31918 low is march 2800, 17400 slope = 31918 - 17400/7070 - 2800 = 14518/4270 = 3.4 to find intercept: 31918 = 3.4*7070 + b 7880 = b cost formula = 3.4*x + 7880 answer: cost = 3.4*x + 7880 2. for 4610 guest days: a. variable = 3.4*4610 = $15,674 b. fixed = $7880 c. total = $15,674 + 7880 = $23,554

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