Question

28. Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan. Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual salary of $41,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,000 per year. The rooms rent at an average price of $60 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10 per person per night and the cost of food which is $5 per person per night. Instructions (a) Determine the number of rentals and the sales revenue Jane needs to break even using the contribution margin technique. (b) If the current level of rentals is 4,000, by what percentage can rentals decrease before Jane has to worry about having a net loss? (c) Jane is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $3 for food costs per person per night. Jane feels she can increase the room rate to $68 per person per night. Determine the number of rentals and the sales revenue Jane needs to break even if the changes are made.

Answer 1

Jane Botosan Requirement a Variable costs per person per night: Fixed costs: Laundry and cleaning 10 Depreciation 60000 Breakfast 5 Maintenance 41000 Total variable Cleaning 15 24000 Real estate tax 10000 Total fixed 135000 Break-even number of persons per night rentals: Fixed costs Contribution margin per person per night rentals 135000 3000 45 *Contribution margin per unit (a) $45 Sales price per unit - Variable cost per unit 60- 15 45 Break-even sales in dollars: Fixed costs / Contribution margin ratio 135000 (45/60) 180000 Requirement b (4000 3000) Margin of Safety = Actual rentals - Break-even rentals = 25% Actual Rentals 4000 Requirement c Variable costs per person per night: Fixed costs: Laundry and cleaning 60000 10 Depreciation Breakfast 8 Maintenance 41000 Total variable Cleaning 18 24000 Real estate tax 10000 Total fixed 135000 Break-even number of persons per night rentals: Fixed costs Contribution margin per person per night rentals 135000 2700 50 Sales price per unit - Variable cost per unit = 68 - 18 = 50 Break-even point in sales dolllars: 2,700 x $68 $183,600