Question

Lori Hayes operates a bed and breakfast hotel. Depreciation on the hotel is $60,000 per year. Lori employs a maintenance person at an annual salary of $30,000 per year and a cleaning person at an annual salary of $24,000 per year. Real estate taxes are $12,000 per year. The rooms rent at an average price of $80 per person per night including breakfast. Other costs are laundry services at a cost of $4 per person per night and the cost of food which is $6 per person per night.

Determine the number of rentals and the sales revenue Lori needs to break even.

Answer 1

Solution:

Contribution margin per person per night = Selling price - Variable cost = $80 - $4 - $6 = $70 per person per night

Annual fixed costs = Depreciation + Salary Expense + Real estate taxes

= $60,000 + $30,000 + $24,000 + $12,000

= $126,000
Number of rentals Lori needs to breakeven = fixed costs / contribution margin per rental

= $126,000 / $70 = 1800 rental

Sales revenue lori needs to breakeven = 1800 * $80 = $144,000