Chapter 2A, Problem 2A.1E

1.

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits and no loss for the company. To estimate: The fixed cost and variable cost of electricity per month using high low method.

Answer to Problem 2A.1E

Variable cost for electricity per month will be1.56 Fixed cost will be 1395

Explanation of Solution

	Occupancy day	Electrical cost
High Activity Level	2406	5148
Low Activity Level	124	1588
Change	2282	3560

Variable cost:

  $\begin{array}{l}Variable\cos t=\frac{Chanel\text{}inCost}{ChangeinLevel}\\ =\frac{3560}{2282}\\ =1.56\end{array}$

Fixed cost:

  $\begin{array}{l}TotalFixed\cos t=Highactivitylevel\cos t-HighActivityLevel\times \mathrm{var}iable\cos t\\ =5147-2406\times 1.56\\ =1394.64\\ =LowactivityLevel\cos t-LowActivitylevelunit\times \mathrm{var}iable\cos t\\ =1588-124\times 1.56\\ =1394.56\end{array}$

Thus, Variable cost for electricity per month will be1.56 Fixed cost will be 1395

2.

To determine

Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits and no loss for the company. The factors affecting the variation in electrical costs from month to month in addition to occupancy day.

Answer to Problem 2A.1E

Season factors like winter, summer, autumn and rainy season

Explanation of Solution

The factors affecting the variation in electrical costs from month to month in addition to occupancy day are:

1. Season factors like winter, summer, autumn and rainy season will affect the variation in electrical costs.
2. Factors like guests not switching off the light and fan at the time leaving the room.