Required: Using the high-low method, estimate the fixed cost of electricity per month. Round off the fixed cost to the nearest whole dollar.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
![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
January
1,736
February 1,904
March
2,356
April
960
May
360
June
744
July
2,108
August 2,406
September 840
October 124
November 720
December 1,364
Occupancy-Days
Electrical Costs
$4,127
$4,207
$5,083
$2,857
$1,871
$2,696
$4,670
$5,148
$2,691
$1,588
$2,454
$3,529
Required:
Using the high-low method, estimate the fixed cost of electricity per month.
Round off the fixed cost to the nearest whole dollar.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5dd1e713-20a5-4384-b92a-26908bf03c20%2Fb16b15eb-7bdb-4185-bcb1-9e5f9bf09b07%2Fe4rzd9_processed.jpeg&w=3840&q=75)
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