Lakeshore Hotel\'s guest-days of occupancy and custodial supplies expense over t
ID: 2574217 • Letter: L
Question
Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the last seven months were: I. Month March Guest-Days of Occupancy Custodial Supplies Expense 4,000 6,500 8,000 10,500 April May $8,250 June 12,000 $13,500 $10,750 9,000 September 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. Required: a) Using the high-low method, estimate a cost formula for custodial supplies expense. Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days? b) Answer:Explanation / Answer
Answer a)
Highest Activity Level : In July ; Guest - Days of Occupancy = 12,000 ; Custodial Supplies Expenses = $13,500
Lowest Activity Level : In March ; Guest - Days of Occupancy = 4,000 ; Custodial Supplies Expenses = $7,500.
Variable cost per unit = Change in total cost / Change in level of activity.
$13,500 -$7,500 / 12,000 - 4,000 = $0.75 per guest days
Now to compute Fixed cost we need to use the variable cost per unit in total cost formula for say lowest level of activity.
Total Cost = Fixed cost + Variable cost ; $7,500 = Fixed cost + $0.75 *4,000
Fixed Cost = $7,500 - $3,000 = $4,500
Required Answer : The cost formula is $4,500 + $0.75 per guest days
Note : We can also represent the cost formula as Y = $4,500 + $0.75X ,
where Y = Total cost ; X =Number of Guest days.
Answer b)
Custodial Supplies Expense for 11,000 guest days
Total variable cost : $0.75 * 11,000 = $8,250
Total fixed cost = $4,500
Total Cost = $4,500 + $8,250 = $12,750
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