Through using the high-low method, Regency Hotels estimates the total costs of p

Question

Through using the high-low method, Regency Hotels estimates the total costs of providing room service meals to amount to $5,950 per month, plus 30 percent of room service revenue.

Required:

(a) What is the contribution margin ratio of providing room service meals? (Omit the "%" sign in your response.)

Contribution margin ratio 70%

(b) What is the break-even point for room service operations in terms of total room service revenue?

(Omit the "$" sign in your response.)

Break-even point $

(c) What would you expect to be the total cost of providing room service in a month in which room service revenue amounts to $15,000? (Omit the "$" sign in your response.)

Total Cost $

Explanation / Answer

a)VARIABLE COST = 30%OF SALES

THEREFORE, CONTRIBUTION MARGIN RATIO = 100% -30%

= 70%

b)BREAKEVEN POINT = FIXED COST/CONTRIBUTION MARGIN RATIO

= 5950/0.7

= $8500

c)TOTAL COST WHEN REVENUE AMOUNTS TO $15000 = VARIABLE COST + FIXED COST

= 15000*0.3 + 5950

=4500+ 5950

=$10450

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