Question

You run an Air BnB hostel as a source of additional income. You have a property available with 10 rooms, and choose to charge each person Rs. 1000 for one day stay (stay + 1 meal). You estimate that each individual staying at your hostel will cost you approximately Rs.500 per day where the variable costs are inclusive of food, utilities, and overheads incurred. The fixed expenses of your hostel are Rs.600,000 per year. Your hostel can accommodate a maximum of 10 guests per night.

Requirements:

Calculate the following:

1. Contribution margin per unit of service. (A unit of service is one night’s lodging for one guest.)

2. Contribution-margin ratio.

3. Annual break-even point in units of service.

4. Annual break-even point in dollars of service revenue.

5. The number of units of service required if fixed expenses increase by 20%.

6. The number of units of service required if variable costs increase by 20%.

7. The number of units of service required to earn a target net profit of R.600,000 for the year. (Ignore income taxes.)

Answer 1

Please hit like if this helps, comment in case of any doubts. Note:- the belowe answer is based on concepts of marginal costing.

1. Contribution margin per unit of service. (A unit of service is one night’s lodging for one guest.) = Sales - Variable Costs = 1000 - 500 = 500

2. Contribution-margin ratio = Contribution / Sales *100 = 500/1000 *100 = 50%

3. Annual break-even point in units of service= Annual Fixed Costs / Contribution Margin = 600000/500 = 1200

4. Annual break-even point in dollars of service revenue= Annual Fixed Costs / Contribution Margin Ratio = 600000/50% = 1200,000

5. The number of units of service required if fixed expenses increase by 20%. = 600,000 * 120% / 500 = 1440

6. The number of units of service required if variable costs increase by 20%.

Revised Variable Costs = 500 * 120% = 600, Contribution = 1000 - 600 = 400.

The number of units of service required if variable costs increase by 20%= 600,000 / 400 = 1500

7. The number of units of service required to earn a target net profit of R.600,000 for the year. (Ignore income taxes.) = (Fixed Cost + Target Profit) / Contribution per unit = (600,000 + 600,000) / 500 = 2400