Help with The Calculation Of The High/Low method

High/Low method - Help!

Hi there,

I am having trouble figuring out how exactly I can solve this with the High-low two-point method, I hope anyone can be of any help.

The manager of the Cloud Hotel, desires to know the breakdown of the electrics Costs between variable cost and fixed categories. She provides you with the following information:

Month Electric expenses Occupancy Percentage
January $6,200 62%
February $6,600 68%
March $7,200 78%
April $5,500 50%

Use the high/low two-point method for:

  • Determine the variable costs per 1 percent occupancy

  • Estimate the fixed costs per month.

  • What is the estimated total electric expense at 62 % occupancy? Why does this differ from the $ 6,200 shown above for January?

Hi,

I would advice to take the highest and lowest point to form your formula.

Variable cost:

($7,200-$5,500) / (78%-50%) = $60.71/1%OCC

Fixed cost:

a) $7,200 - ($60.71/1% x 78%) = $2,464.28

b) $5,500 - ($60.71/1% x 50%) = $2,464.28

So, Fixed cost estimated at $2,464.28

Estimated cost at 62%:

($60.71/1% x 62%) + $2,464.28 = $6,228.30

$6,228.30 - $6,200.00 = $28.30 different from January

Less than 1% of the increases of cost, may advise the management to accept the differences.

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