A resort hotel has total annual sales revenue of $1,000,000, variable costs of $

Question

A resort hotel has total annual sales revenue of $1,000,000, variable costs of $350,000, and fixed costs of $750,000. The fixed costs include $80,000 a year for land rental lease. The landowner offered an alternative variable rent based on 10% of the revenue. If the management accepts this proposal, what would be the new breakeven point? (Hint: Acceptance of the variable lease will reduce fixed costs by $80,000 and increase variable costs by 10%.) What is the indifference point? Explain whether management should accept this proposal if next yer's total sales revenue is expect4ed to be $1,200,000.

Explanation / Answer

here sales =$1,000,000 variable cost = $350,000 Fixed cost = $750,000 fixed cost include the $80,000 rent manufacturing fixed cost = $670,000 now the new variable cost = 350,000+0.10*1,000,000 =$ 450,000 contribution margin = 1,000,000 -450,000 =$550,000 Contribution margin ratio = contribution margin /sale =550,000/1,000,000 =0.55 break even point sale = Fixed cost /contribution margin = 670,000/0.55 =$1,218,182 (answer) b) older contribution margin = 1,000,000-350,000 =650,000 contribution margin ratio = 650,000/1,000,000 =0.65 older break even sale =Fixed cost /contribution margin ratio = 750,000/0.65 =$ 1,153,846 since older break even sale$1,153,846 is less than $1,200,000 and new break even $1,218,182 is greater than $1,200,000 so management should not accept the new proposal.(answer)

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