Chapter 2, Problem 14E

EXERCISE 2-14 High-Low Method: Predicting Cost [L02-4, L02-5]
The Lakeshore Hotel’s guest-days of occupancy and custodial supplies expense over the last seven months were:

Month	Guest-Daysof Occupancy	CustodialSupplies Expense
March ….	4,000	$7,500
April ….	6,500	$8,250
May ….	8.000	$10500
June ….	10,500	$12,000
July ….	12,000	$13,500
August ….	9,000	$10,750
September ….	7.500	$9,750

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:
1. Using the high-low method, estimate a cost formula for custodial supplies expense.
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 11,000 guest-days?
3. Prepare a scattergraph using the data given above. Plot custodial supplies expense on the vertical axis and the number of guest-days occupied on the horizontal axis. Draw a straight line through the two data points that correspond to the high and low levels of activity. Make sure your line intersects the Y-axis.
4. Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis estimated the total fixed costs to be $3,973.10 per month and the variable cost to be $0.77 per guest-day. How would the straight line that you drew in requirement 3 differ from a straight line that minimizes the sum of the squared errors?
5. Using the least-squares regression estimates given in requirement 4, what custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days?