2)Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Mic

Question

2)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 $32,000 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.

Instructions

(a)      Determine the number of rentals and the sales revenue Jane needs to break even using the contribution margin technique.

(b)      If the current level of rentals is 3,500, by what percentage can rentals decrease before Jane has to worry about having a net loss?

Explanation / Answer

(a)     Variable costs per person per night:              Fixed costs:                Laundry and cleaning                $10               Depreciation                      $ 60,000                Breakfast                                       5               Maintenance                         32,000                      Total variable                       $15               Cleaning                                24,000                                                                                        Real estate tax                      10,000                                                                                              Total fixed                   $126,000
         Break-even number of persons per night rentals:
Fixed costs = $126,000 = 2,800 rentals Contribution margin per person per night $45*
        *Sales price per unit                                $60          Variable cost per unit                              15          Contribution margin per unit                  $45
         Break-even sales in dollars:
Fixed costs = $126,000 = $168,000 Contribution margin ratio 75%**
      **Contribution margin per unit (a)             $45          Sales price per unit (b)                           $60          Contribution margin ratio (a) Fixed costs = $126,000 = 2,800 rentals Contribution margin per person per night $45*

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