Great Eastern Inns has a total of 1,000 rooms in its chain of motels located in
ID: 2608805 • Letter: G
Question
Great Eastern Inns has a total of 1,000 rooms in its chain of motels located in eastern Canada. On average, 60% of the rooms are occupied each day. The company’s operating costs are $17 per occupied room per day at this occupancy level, assuming a 30-day month. This $17 figure contains both variable and fixed cost elements. During February, the occupancy rate dropped to only 50%. A total of $283,500 in operating cost was incurred during February. 1. Estimate the variable cost per occupied room per day. (Assume 30 days in a month. Do not round intermediate calculations and round your final answer to 2 decimal places.) 2. Estimate the total fixed operating costs per month. 3. Assume that the occupancy rate increases to 65% during March. What total operating costs would you expect the company to incur during March? (Assume 30 days in a month. Do not round intermediate calculations.)
Explanation / Answer
Day Rooms at the 60% capacity per month = 1000 * 60% * 30 = 18000
Monthly Operating cost at 60% capacity ie. 18000 day rooms = 18000 * $17 = $306000
February's Operating cost at 50% capacity i.e 15000 day rooms = $283500
Difference = 3000 day rooms = $22500
1. The variable cost per occupied room per day = $22500 / 3000 = $7.50
2. Fixed Opersting cost per month = 306000 - 18000 * $7.50 = $171000
3. March's operating costs at 65% i.e. (18000 * 65/60 = 19500 day rooms) = 19500 * $7.50 + 171000 = $317250
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