Question

answers on the graded. 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 renta ls 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 add itional $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

Answer. In the given question, :

Computation of Break Even Rentals, Sales Revenue and Margin of Safety

The total fixed cost per year are-	$
Annual Depreciation Expense	60,000
Maintenance Person annual Salary	41,000
Cleaner's annual Salary	24,000
Annual Real Estate Taxes	10,000
Total Fixed Cost per year.........................................................	$135,000
Total Variable Costs per person per night-
Breakfast	$5
Laundry & Cleaning Expense	$10
Total Variable Costs per person per night	$15
Room Rental (Selling Price) per person per night.	.$60
(a) Calculation Break-even Rentals and Sales Revenue
Room Rental (Sales) per person per night	$60
Less: Variable Cost per person per night	($15)
Contribution Margin per person per night	$45
No. of Rentals to Break-even = Total Fixed Costs $\div$ Contribution margin per rental
= $135,000 $\div$ $45 = 3,000 Rentals
Sales Revenues at Break-even = Break-even Rentals $\times$ Room Rental per night
= 3,000 $\times$ $60 = $180,000
(b) Computation of rental that can decrease before Net Loss
(The current level of rentals is 4,000 and the Break-even rentals is 3,000. So,
We can compute % of Margin of Safety (MOS) to determine by what percentage
rental can decrease before Jane has to worry about having net loss.
Margin of Safety = Current level rentals - Break-even rentals= 4,000 -3,000 =1,000
% of MOS = MOS $\div$ Current level of rentals = 1,000 $\div$ 4,000 = 0.25 or 25%
So, rental can decrease by 25%, before Jane has to worry about having net loss.
Because at Break-even rental, Jane will have no profit or loss. If rental goes below
3,000 rentals, Jane will start having Net loss as she could not be able to cover some
her total cost out of her total revenues.
(C) Computation of New Break-even Rental and Sales Revenue
If the Rental per night per person increases to $68 and Food Cost by $3
New Rental per person per night = $68; New Variable Cost = $15 + $3 = $18
Total Fixed Cost (unchanged) = $135,000
New Contribution Margin = $68 - $18 = $50
New Rentals to Break-even = Total Fixed Costs $\div$ Contribution margin per rental
= $135,000 $\div$ $50 = 2,700 rentals
New Sales Revenues to Break-even = Break-even Rentals $\times$ Room Rental per night
= 2,500 $\times$ $68 = $183,600