 # Occupancy costs and Operating Expenses

In one of the problems in Schweser, the operating expenses are assumed to be 30% fixed and 70% variable. If 100k sq ft was fully occupied, the utility expense would be \$6/sq ft. The problem asks :what is the utility expense per occupied sq ft if the building is 90% occupied?

This is what I did.

If 100k sq qas fully occupied, we would have total operating expense of 600,000\$ where 180,000\$ are fixed ( 1.8\$ per sq ft) and 420,000\$ are variable ( 4.2\$ per sq ft)

Now 90% is occupied, so the fixed costs would remain the same, meaning180,000\$ and the variable costs would be 378,0000\$ which makes sense because occupancy is low and operating expense is supposed to be lower ,but I am not sure why the book goes futher and does 558,000/90,000 to get 6.20\$ .
I stopped at 5.58\$ thinking that was the answer, why did the costs go up to 6.20?

Because 90% of the space is occupied so that is 90,000 sq ft.

The question requires cost per occupied sq ft, which is over 90,000 and not 100,000.

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The question asks Per occupied sq ft, since it is 90% occupied that’s why you have to divide by 90,000 sq ft. If you were to stop at \$5.58, that means you divide by 100k sq ft. Therefore, it has to be divided by 90,000 sq ft.

but does it make sense that the cost per occupied sq ft increased? Like we have less variable costs

Of course. While your variable cost is lower (\$378k), the variable cost per sq ft is still \$4.20 (\$378k/90k). The fixed cost per sq ft is now higher (given you are spreading the same amount \$180k over less occupied space) => \$180k/90k = \$2/sq ft.

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Like @fino_abama said. You are using only 90% of it. Remember? Fixed cost is what you pay no matter what (whether you use it or not). Variable cost is what you pay when you’re using it. The question asks you in terms of per sq ft occupied.

• The variable costs will be constant no matter what occupied space is used.
• The less the occupied space is used, the more the fixed costs per sq ft will be.

Try to assume 80%, 50%, or 40% occupied space. You will see the effect.)

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