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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.
Determine the number of rentals and the sales revenue Jane needs to break even using the contribution margin technique.
Break-even number of rentals
Break-even sales $
If the current level of rentals is 4,000, by what percentage can rentals decrease before Jane has to worry about having a net loss?
Margin of safety %
Jane is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $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.
Break-even number of rentals
Break-even sales

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facundobuzzetti

Answer:

Results are below.

Explanation:

First, we determine the total fixed costs and unitary variable cost:

Total fixed costs= 60,000 + 41,000 + 24,000 + 10,000

Total fixed costs= $135,000

Unitary variable cost= 10 + 5= $15

To calculate the break-even point in units and dollars, we need to use the following formulas:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 135,000 / (60 - 15)

Break-even point in units= 3,000 rentals

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 135,000 / (45/60)

Break-even point (dollars)=$180,000

Now, we can determine the margin of safety:

Margin of safety ratio= (current sales level - break-even point)/current sales level

Margin of safety ratio= (4,000 - 3,000) / 4,000

Margin of safety ratio= 25%

Sales can decrease by 25% before having a net loss.

Increase in unitary variable costs= $3

Increase in selling price= $8

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 135,000 / (68 - 18)

Break-even point in units= 2,700 rentals

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 135,000 / (50/68)

Break-even point (dollars)=$183,600

anthougo

The determination of the requirements for Jane Botosan's Bed and Breakfast Hotel is as follows:

1. The number of rentals for Jane to break even is 3,000, and the Sales Revenue is $180,000.

2. Jane should become worried if the rentals decrease by 25% from the current level of 4,000.

3. When Jane upgrades the breakfast service with the additional variable costs and revenue, the number of rentals for Jane to break even is 2,700, and the Sales Revenue is $183,600.

Data and Calculations:

Depreciation = $60,000

Annual salary of maintenance person = $41,000

Cleaner's annual salary = $24,000

Real Estate taxes per year $10,000

Total fixed cost per year = $135,000

Rental fee per person per night = $60

Laundry and cleaning per person per night = $10

Cost of food per person per night = $5

Total variable cost per person per night = $15

Contribution margin per unit = $45 ($60 - $15)

Contribution margin ratio = 75% ($45/$60 x 100)

Break-even number of rentals = 3,000 rentals ($135,000/$45)

Break-even sales revenue = $180,000 ($135,000/75%)

Margin of Safety = 1,000 (4,000 - 3,000) rentals

Margin of Safety Ratio = 25% (1,000/4,000 x 100)

New Price and Costs:

Rental fee per person per night = $68

Variable cost per person per night = $18 ($15 + $3)

Contribution margin per unit = $50 ($68 - $18)

Contribution margin ratio = 73.529% ($50/$68 x 100)

Break-even number of rentals = 2,700 rentals ($135,000/$50)

Break-even sales revenue = $183,600 ($135,000/73.529%)

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