Question

3. The pleasure leisure hotel has 30 bedrooms. The hotel is open all year round and has a capacity of 10,950 (30 x 365) bed-nights. It is anticipated only 9.000 rooms will be taken up this year. However Duncan tours Ltd. has offered to take up the spare Capacity of 1,950 bed-nights for $20 per bed-night. The hotel normally charges $50 a night, with the variable cost per rcom amounting to $15 and annual fixed costs amounting to $135,000. The following is the summary profit statement based on selling 9,000 bed nights: Per unit Total Sales $ 50 $450,000 Less: Variable costs 135.000 15 Fixed costs 15 135,000 Projected Net profit 180,000 a) Calculate the incremental profit of loss of the company. (3 marks) b) Should the hotel take up the offer from the tour company? Give suitable advice th company (2 marks)

Answer 1

a) Calculation of increment profit or loss of the company
PLEASURE LEISURE HOTEL
Statement showing calculation of incremental profit/loss
	Current Projections	If Duncan Tours Offer is Accepted	Incremental Profit/(Loss)
Sales	$450,000	$489,000	$39,000
Variable Costs	$135,000	$164,250	$29,250
Contribution Margin	$315,000	$324,750	$9,750
Fixed Costs	$135,000	$135,000	$0
Projected Net Profits	$180,000	$189,750	$9,750
b)
Although the projected net profits per room would decline from $ 20 to $ 17.33,the hotel should
accept the offer from Duncan Tour Ltd. since by accepting the offer the company would earn an
incremental contribution margin of $ 5 per room taken by the tour company.The total incremental
contribution as well as the net profits would increase by $ 9,750 ( $ 5 * 1,950)
Working Notes
Sales	Unit Price	Room Nights	Current Projections	If Duncan Tours Offer is Accepted
At Current Projections	$50	$9,000	$450,000	$450,000
If Duncan Tours offer is accepted	$20	$1,950	$0	$39,000
Total Sales			$450,000	$489,000
Variable Costs	Unit Price	Room Nights	Current Projections	If Duncan Tours Offer is Accepted
At Current Projections	$15	$9,000	$135,000	$135,000
If Duncan Tours offer is accepted	$15	$1,950	$0	$29,250
Total Variable Costs			$135,000	$164,250
Fixed Costs by their nature would not change and would remain the same at both the levels of
occupancy,i.e., $ 135,000
	Total	Per Unit
	Current Projections	If Duncan Tours Offer is Accepted	Current Projections	If Duncan Tours Offer is Accepted
Sales	$450,000	$489,000	$50	$45
Variable Costs	$135,000	$164,250	$15	$15
Contribution Margin	$315,000	$324,750	$35	$30
Fixed Costs	$135,000	$135,000	$15	$12
Projected Net Profits	$180,000	$189,750	$20	$17