Jameson’s hotel group prepares published accounts on a quarterly basis. The seni

Question

Jameson’s hotel group prepares published accounts on a quarterly basis. The senior management is reviewing the performance of one of the hotels in the group and making plans for 2018/19. They have in front of them the results for 2017/18 (based on actual results for the first two quarters and forecasts to the end of the year).

Quarter Sales Profit/(loss)
1 400,000 (280,000)

2 1,200,000 360,000

3 1,600,000 680,000

4 800,000 40,000

The total estimated number of visitors (guest nights) for 2017/18 is 50,000. The results follow a regular pattern, with no unexpected cost fluctuations beyond the seasonal trading pattern. Management intend to add to their plans for 2018/19 an anticipated increase in unit variable costs of 10% and a profit target for the hotel of $1 million.

Required: (a) Determine the total variable and total fixed costs of the hotel for 2017/18, by using both a PV chart and by calculation. (b) i. If there is no increase in visitors for 2018/19, what will be the required revenue rate per hotel visitor to meet the profit target? ii. If the required revenue rate per visitor is not raised above the 2018/19 level, how many visitors are required to meet the profit target? (c) Outline and briefly discuss the assumptions underlying the accountants’ typical PV or break-even analysis and assess whether they limit its usefulness.

Note: In order to achieve full marks for this question it is essential that you fully explain what you are doing, why you are doing it and the steps involved in providing a final solution. Ensure your answer is not just a set of calculations as 25% of the marks for this question are set aside for your explanation.

Explanation / Answer

Solution (a) Particulars q1 q2 q3 q4 Total Sales 400000 1200000 1600000 800000 4000000 Less:Variable Cost (sale * 0.20) 80000 240000 320000 160000 800000 Contribution (sale * 0.80) 320000 960000 1280000 640000 3200000 Less: fixed cost (b.f.) 600000 600000 600000 600000 2400000 Profit -280000 360000 680000 40000 800000 notes:Calculation of PV ratio: change in profit/change in sales 360000-(-280000)/120000-400000 0.8 So, Pv ratio is 80% Solution b) (i) Existing rate per guest= total revenue / total visitors                                                =4000000/50000                                                  =80 Rate to be charged for earning 1 million profit Profit 1000000 Add: Fixed cost 2400000 Variable cost (800000+10%) 880000 Total revenue to earn 4280000 total guest 50000 rate per guest (revenue/guest) 85.6 Solution b) ii) no of visitors to meet target profit total revenue to earn 4280000 rate per visitor 80 no of visitors to meet target profit 53500

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