Exercise 22-6 The Palmer Acres Inn is trying to determine its break-even point d

Question

Exercise 22-6 The Palmer Acres Inn is trying to determine its break-even point during its off-peak season. The inn has 50 rooms that it rents at $125 a night. Operating costs are as follows: Salaries Utilities Depreciation Maintenance Maid service Other costs $5,100 per month $1,000 per month $1,100 per month $3,450 per month $34 per room $66 per room Determine the inn's break-even point in number of rented rooms per month. Break-even point rooms Determine the inn's break-even point in dollars. Break-even point

Explanation / Answer

Variable costs per room

= Maid service + Other costs

= $34 + $66

= $ 100 per room

Contribution per room

= Selling price – Variable costs

= $125 - $100

= $25 per room

Fixed costs per month

= Salaries + Utilities + Depreciation + Maintenance

= $5,100 + $1,000 + $1,100 + $3,450

= $ 10,650

So, Break-even point

= Fixed costs / Contribution per room

= $ 10,650 / $25

= 426 rented rooms per month

Break-even point in dollars

= Break-even point in units x Selling price per unit

= 426 x $125

= $ 53,250 per month

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