Question

Sunshine continental Hotel Pty Ltd. is hotel established in 1956 Sorento, Victoria near the Sorrento Ferries. They are well known for their seashore facing full serviced rooms. All their 325 rooms are one size thus they all have the same features, and that adds as an advantage among other competitors in the area

They are planning to open a new hotel in late 2019 adjacent, they want to be proactive and decide for any expenses that might be arising because of this new establishment. As a Revenue manager you are approached to evaluate factors affecting value perceptions in this industry.

Ben the owner is sure that you can help him to point out the cost drivers and evaluate management cost drivers that measure performance of the cost control and he would like to know where his business is using cost volume profit analysis

The extract of Sunshine continental Hotel Pty Ltd. is below which you should use for your analysis.

Profit and Loss Statement for Sunshine Continental Hotel for the year ended 30th June 2019 CURRENT YEAR/ACTUAL BUDGETED YEAR 2018-2019 2018-2019 $87,750.00 $87,750.00 $97,500.00 $97,500.00 Income Rooms sales total income Expenses Bank charges Credit card commission Business insurance Marketing & Promotional Newspapers & magazines for customers Laundry/dry cleaning Cleaning & cleaning products Website Expenses Permanent employees wages Casual employee wages Superannuation $450.00 $658.13 $770.00 $2,500.00 $720.00 $665.00 $990.00 $1,775.00 $31,000.00 $17,500.00 $4,607.50 $350.00 $731.25 $770.00 $1,750.00 $600.00 $450.00 $800.00 $1,775.00 $31,000.00 $15,500.00 $4,417.50

Recommendation for Cost volume Profit analysis : ( 1500 words) (15 Marks)

Recommend and explain to Ben what is cost volume profit analysis in detail and calculate the break even for the current hotel rooms and also recommend him his break even point for the rooms ( Please help with the break even point recommendation in detail )

Answer 1

what is cost volume profit analysis:-

cost behavior analysis is the study of how specific cost respond to change in the level of business activity. some cost change and others remains same. a knowledge of cost behavior helps management plan operation and decide between alternative course of action. cost behavior analysis applies to all entities.

the starting point of cost volume profit analysis is measuring the key business activities like room occupancy in case of hotel. change in the level of activity should be correlated with the change in level of cost. companies can classify the behavior of cost in response to change in activity levels into three categories variable, fixed or mixed.

variable cost:- variable cost are those cost that vary in total directly and proportionately with change in the activity level. if the level increases 10% total variable cost will increase 10%. if the level of activity decreases by 25% variable cost will decrease 25%. examples of variable cost include direct material and direct labor, sales commission etc. a variable cost may also be defined as a cost that remains the same per unit at every level of activity.

fixed cost:- fixed cost are costs that remain the same in total regardless of changes in the activity level. examples include property taxes, insurance , rent etc. because total fixed costs remain constant as activity change, it follows that fixed costs per unit vary inversely with activity: as volume increases unit cost declines and vice versa.

mixed cost:- mixed cost are cost that contain both variable and fixed cost element. mixed cost therefore change in total but not proportionately with changes in the activity level.

cost volume profit (CVP) analysis is the study of the effect of changes in cost and volume on a company's profit. CVP analysis is important is profit planning. it also is a critical factor in such management decisions as setting selling prices, determining product mix and maximizing use of production facilities.

CVP income statement:- (performa)

sales XXXX

(-) variable cost XXXX

contribution XXXX

(-) fixed cost XXXX

net income XXXX

contribution margin is the amount of revenue remaining after deducting variable cost.

contribution margin ratio:-

the contribution margin ratio is the contribution margin expressed as a percentage of sales. contribution margin ratio can be determined by dividing the unit contribution margin by the selling price.

breakeven point:- a key relationship in cvp analysis is the level of activity at which total revenues equal total cost. the break even point. at this volume of sales the compant will realize no income but will suffer no loss. knowladge of breakeven point is useful to mangement when it considers decision such as whether to introduce new product line, change sales prices or enter in new market area.

breakeven point in units = fixed cost / unit contribution margin

breakeven point in dollars= fixed cost / contribution margin ratio