Nobesuthu Pty Ltd has a total of 2 000 rooms in its national wide chain of Guest houses. On average, 70% of the rooms are occupied each day. The company’s operating costs are R21 per occupied room per day at this occupancy level, assuming a 30-day month. This R21 figure contains both fixed and variable costs elements. During May, the occupancy rate dropped to only 45%. The total of R792 000 in operating cost was incurred during May.Required:Using the high-low method calculate the following and choose the correct answer from the options provided:The variable cost per occupied room per day Blank 1 .The total estimated fixed cost per month Blank 2 .Assume that the occupancy rate increases to 60% during May. What total operating costs would you expect the company to incur during May Blank 3 .PART BNomarally Pty Ltd manufactures and sells a single product. A partially completed schedule of the company’s total and per unt costs over a relevant range of 60 000 to 80 000 units and sold each is given below:Units produced and sold60 00080 000Total costs Variable costs150 000Blank 4Fixed costs360 000Blank 5Total costs510 000Blank 6Cost per unit Variable costBlank 7Blank 8Fixed costBlank 9Blank 10Total cost per unit??Required:Fill-in the missing figures by choosing the correct answers from the options provided.
Question
Nobesuthu Pty Ltd has a total of 2 000 rooms in its national wide chain of Guest houses. On average, 70% of the rooms are occupied each day. The company’s operating costs are R21 per occupied room per day at this occupancy level, assuming a 30-day month. This R21 figure contains both fixed and variable costs elements. During May, the occupancy rate dropped to only 45%. The total of R792 000 in operating cost was incurred during May.Required:Using the high-low method calculate the following and choose the correct answer from the options provided:The variable cost per occupied room per day Blank 1 .The total estimated fixed cost per month Blank 2 .Assume that the occupancy rate increases to 60% during May. What total operating costs would you expect the company to incur during May Blank 3 .PART BNomarally Pty Ltd manufactures and sells a single product. A partially completed schedule of the company’s total and per unt costs over a relevant range of 60 000 to 80 000 units and sold each is given below:Units produced and sold60 00080 000Total costs Variable costs150 000Blank 4Fixed costs360 000Blank 5Total costs510 000Blank 6Cost per unit Variable costBlank 7Blank 8Fixed costBlank 9Blank 10Total cost per unit??Required:Fill-in the missing figures by choosing the correct answers from the options provided.
Solution
PART A
- To calculate the variable cost per occupied room per day, we first need to find the total variable cost. We do this by subtracting the total cost at the low activity level from the total cost at the high activity level. Then, we divide this by the change in activity level.
High activity level: 70% occupancy of 2000 rooms = 1400 rooms Low activity level: 45% occupancy of 2000 rooms = 900 rooms Change in activity level = 1400 - 900 = 500 rooms
Total cost at high activity level = 1400 rooms * R21/room/day * 30 days = R882,000 Total cost at low activity level = R792,000 Change in total cost = R882,000 - R792,000 = R90,000
Variable cost per occupied room per day = Change in total cost / Change in activity level = R90,000 / 500 rooms = R180/room
- To calculate the total estimated fixed cost per month, we subtract the total variable cost at the high activity level from the total cost at the high activity level.
Total variable cost at high activity level = 1400 rooms * R180/room = R252,000 Total estimated fixed cost per month = R882,000 - R252,000 = R630,000
- If the occupancy rate increases to 60% during May, the total operating costs would be the sum of the total variable cost and the total fixed cost.
Total rooms occupied = 60% * 2000 rooms = 1200 rooms Total variable cost = 1200 rooms * R180/room = R216,000 Total operating costs = R216,000 + R630,000 = R846,000
PART B
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Variable costs are constant per unit, so the total variable cost at 80,000 units would be (80,000/60,000) * 150,000 = R200,000
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Fixed costs are constant in total, so the total fixed cost at 80,000 units would be the same as at 60,000 units = R360,000
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Total costs at 80,000 units would be the sum of the variable and fixed costs = R200,000 + R360,000 = R560,000
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Variable cost per unit at 60,000 units = R150,000 / 60,000 units = R2.50/unit
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Variable cost per unit at 80,000 units = R200,000 / 80,000 units = R2.50/unit
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Fixed cost per unit decreases as activity level increases. At 60,000 units, fixed cost per unit = R360,000 / 60,000 units = R6/unit. At 80,000 units, fixed cost per unit = R360,000 / 80,000 units = R4.50/unit
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Total cost per unit is the sum of the variable cost per unit and the fixed cost per unit. At 60,000 units, total cost per unit = R2.50/unit + R6/unit = R8.50/unit. At 80,000 units, total cost per unit = R2.50/unit + R4.50/unit = R7/unit.
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