Question

Question:

Kim operates a hotel at and charges guests $60 per day . Included in this price is a free breakfast. Kim’s hotel has the capacity to rent 5,000 days per year.

The hotel has the following costs:

• Depreciation on the hotel is $60,000 per year.

• Kim employs a maintenance person at an annual salary of $41,000

• Kim employs a cleaning person at an annual salary of $24,000.

•Real estate taxes are $10,000 per year.

•Costs for cleaning service is $10 per day.

•Cost of food is $5 per day .

Instructions Part 1

1. What are the hotels total fixed costs?

2. What are the hotels variable costs per night?

3. What is the contribution margin ratio?

4. What is the variable cost ratio?

5. How many days will the hotel need to rent rooms in order to break -even?

6. What is the hotels break -even sales revenue?

7. What is the margin of safety if there have been a total of 4,000 days rented so far.

8. Prepare a CVP Income Statement for 4,000 days rented.

9. What will be the total contribution margin at 6,000 days rented.

Part 2

The following changes are being considered:

Kim is considering upgrading the breakfast service to attract more business and increase prices.

• This will cost an additional $3 for food per day .

• Kim feels she can increase the room rate $8 per day .

1. Determine the break -even number of rentals days if the change is made.

2. Determine the break -even s ales revenue if the changes are made.

3. Prepare a CVP income statement for 4,000 days rented if this change is made.

Answer 1

Part 1 :

1. Computation of fixed costs :

Fixed Costs	Amount
Depreciation	$60,000
Maintenance person salary	41,000
Cleaning person salary	24,000
Real Estate taxes	10,000
Total fixed costs	$135,000

2. Computation of variable cost per night :

Variable costs	Amount
Cleaning service	$10
Food	5
Variable cost per day	$15

3. Contribution margin per day = Selling price per day - Total variable cost per day

= $60 - $15 = $45

==> Formula to calculate Contribution margin ratio = Contribution margin per day / Selling price per day

= $45 / $60 = 75%

4. Formula to calculate Variable cost ratio = Variable cost per day / Selling price per day

= $15 / $60 = 25%

5. Formula to calculate Break-even days = Fixed costs / Contribution margin per day

= $135,000 / $45 = 3,000 days

6. Break-even sales revenue = 3,000 days X $60 per day = $180,000

7. Formula to calculate Margin of safety = Expected sales - Break-even sales / Expected sales

= 4,000 - 3,000 / 4,000

= 1,000 / 4,000 = 25%

8.

Contribution margin Income statement
Sales (4,000 X $60)	$240,000
Less : Variable Costs (4,000 X $15)	(60,000)
Contribution margin	$180,000
Less : Fixed costs	(135,000)
Income	$45,000

9. Calculation of Contribution margin for 6,000 days :

Sales (6,000 X $60)	$360,000
Less : Variable Costs (6,000 X $15)	(90,000)
Contribution margin	$270,000

Part 2 :

==> Revised selling price per day = $60 + $8 = $68

==> Revised Variable cost per day = $15 + $3 = $18

==> Contribution margin per day = $68 - $18 = $50

1. Break-even days = $135,000 / $50 = 2,700 days

2. Break-even sales revenue = 2,700 X $68 = $183,600

3.

Contribution margin Income statement
Sales (4,000 X $68)	$272,000
Less : Variable Costs (4,000 X $18)	(72,000)
Contribution margin	$200,000
Less : Fixed costs	(135,000)
Income	$65,000