7. value 10.00 points Exercise 6-1 Applying the High-Low Method; Predicting Cost

Question

7. value 10.00 points Exercise 6-1 Applying the High-Low Method; Predicting Cost (LO2 - CC9) The Lakeshore Hotel's occupancy-days and custodial supplies expense over the last seven months were as follows Custodial Supplies Month March April May June July August September Occupancy-Days 8,400 9,600 13,100 20,500 27,000 18,800 15,500 Expense $ 14,220 15,500 18,280 23,900 29,100 21,190 19,250 Occupancy-days are a measure of the overall activity at the hotel. For example, when a guest stays at the hotel for three days, it is counted as three occupancy-days Required: 1. Using the high-low method, estimate a cost formula for custodial supplies expense. (Round the "Variable cost" to 2 decimal places.) 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 14,000 occupancy-days? Variable cost Fixed cost Total cost

Explanation / Answer

1)- High-Low Method:-

Variable cost per unit (x) is calculated using the following formula:

Variable cost per unit=a2-a1/b2-b1

Where,
a2 is the total cost at highest level of activity;
a1 is the total cost at lowest level of activity;
b2 are the number of units at highest level of activity; and
b1 are the number of units at lowest level of activity

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = a2 – x*b2 = a1 – x*b1

We have,
at highest activity: b2 = 27000; a2 = $29100
at lowest activity: b1 = 8400;   a1 = $14220

Variable Cost per Occupancy days = ($29100 $14220) ÷ (27000 8400)  

                                     = $14880/18600 Occupancy days =$.80 per occupancy days
Total Fixed Cost = $29100 ($.80 × 27000) = $29100 – $21600 =$7500
Y=$7500+.80X

2)- Total cost at 14000 Occupancy days = Variable cost + Fixed cost

                                           =(14000 Occupancy days *$.80 per Occupancy days)+$7500

                                          =$11200+$7500

                                           =8700

Variable cost =$11200

Fixed cost =$7500        

Variable cost per unit=a2-a1/b2-b1

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