E6-1 Compute break-even point and margin of safety The Soma Inn is trying to det

ID: 2563369 • Letter: E

Question

E6-1 Compute break-even point and margin of safety The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $60 a night. Operating costs are as follows. Salaries $10,600 per month Utilities 2,400 per month Depreciation 1,500 per month Maintenance 800 per month Maid service 8 per room Other costs 34 per room Instructions (a) Determine the inn's break-even point in (1) number of rented rooms per month and (2) dollars. (b) 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? NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" . After you have completed E6-1, consider the following additional questions. 1. Assume that the rental rate per room changed to $65 per night. Recalculate break-even point in units and dollars. Round CM ratio to one decimal point. 2. If the inn plans to rent 60 rooms average per day at the new rate of $65 per night, recalculate the margin of safety in dollars and the margin of safety ratio. E6-1 Compute break-even point and margin of safety The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $60 a night. Operating costs are as follows. Salaries $10,600 per month Utilities 2,400 per month Depreciation 1,500 per month Maintenance 800 per month Maid service 8 per room Other costs 34 per room Instructions (a) Determine the inn's break-even point in (1) number of rented rooms per month and (2) dollars. (b) 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? NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Explanation / Answer

(a-1) Break Even Point in number of rented rooms

Break Even Point

Break Even Point is the level of sales at which costs are equal to sales revenue and profit is zero. In other words, at break even point contribution margins are equal to total fixed cost.

Contribution Margin Per Room = Selling Price per room – Total Variable Cost per room

= $60 – (Maid Service per room $8 + Other costs per room $34)

= $18 per room

Total Fixed Cost Per Month

Fixed Cost Per Month

Salaries

$10,600

Utilities

$2,400

Depreciation

$1,500

Maintenance

$800

TOTAL FIXED COST

$15,300

Break Even Point in number of rooms = Total Fixed Costs / Contribution Margin per room

= $15,300 / $18

= 850 Rooms

a-2) Break Even point in dollars

Break Even Point in dollars = Break Even Point in room x Rent Per Room

= 850 rooms x $60

= $51,000

Or Break Even Point in dollars = Total Fixed Cost / Contribution Margin Ratio

Contribution Margin Ratio = Contribution Margin per room / Rent per room x 100

= 18 / 60 x 100

= 30%

Or Break Even Point in dollars = $15,300 / 30% = $51,000

b-1) Monthly Margin of Safety in dollars

Total Rent from rooms = 50 rooms per day x 30 days x $60 = $90,000

Margin of Safety in dollars = Total Rent from renting of rooms 90,000 – Break Even Point in dollars 51,000

= $39,000

b-2) Margin of Safety in Ratio = Margin of Safety in dollar / Total Rent from rooms x 100

= 39,000 / 90,000 x100

= 43.33%

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