Exercise 19-1 The Soma Inn is trying to determine its break-even point. The inn

Question

Exercise 19-1 The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $56 a night. Operating costs are as follows. Salaries Utilities Depreciation Maintenance Maid service Other costs $10,000 per month 2,100 per month ,500 per month 800 per month 7 per room 31 per room Determine the inn's break-even point in (1) number of rented rooms per month and (2) dollars. 1. Break-even point in rooms 2. Break-even point If the inn plans on renting an average of 50 rooms per day (assuming a 30-day month), what is (1) the monthly margin of safety in dollars and (2) the margin of safety ratio? (Round ratio to O decimal places, e.g. 10.) 1. Margin of safety 2. Margin of safety ratio

Explanation / Answer

1. Contribution margin per room = $56 – ($7 + $31) = $18
Contribution margin ratio = $18 / $56 = 31.14

Fixed costs = $10,000 + $2,100 + $1,500 + $800 = $14,400
Break-even point in rooms = $14,400 / $18 = 800

2. Break-even point in dollars = 800 rooms x $56 per room = $44,800 per month

1. Margin of safety in dollars:

Planned activity = 50 rooms per day x 30 days = 1,500 rooms per month

Expected rental revenue = 1,500 rooms x $56 = $84,000
Margin of safety in dollars = $84,000 – $44,800 = $39,200

2. Margin of safety ratio = $39,200 / $84,000 = 47%

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