Question

Phil and Carol eloped (at 59 and 46) to New Mexico and then told the kids they were moving there permanently. After 5 years in downtown Albuquerque, Carol made one of her frequent flights east to visit family. She returned to find that Phil had rented out a bedroom, declaring they were in the "Bed and Breakfast" business. In a year, they expanded to a pricy suburb by buying/renovating a larger estate with 6 rooms or apartments.

Phil cooked breakfast; Carol bought; they lived in a separate suite and frequently hosted guests for cocktail hour. The average life-span for B&B owners is about 4 years. After about 3 years, Phil was tired of doing breakfasts. He and Carol built their own home next door, hired Maggie to run the B&B, and pitched in when needed.

You have been asked to help them see where this business is financially. Use the following information to prepare a two-page analysis.

Room prices range, but average $85 per night. Last year without Maggie, they generated about $30,000 in revenue. Expenses this year (e.g., advertising, telephone, mortgage, repairs/maintenance, utilities, Maggie's base salary) are generally fixed ($34,739) except for breakfast which is variable (last year = $3,729).

Maggie's salary consists of a base of $7500 plus a commission of 35% of revenue over $25,000, and a free room (the separate suite).

Questions:

1. Last year (before Maggie) what was breakeven (in room/nights and $s)? Did they make a profit? What was the maximum profit that could be made?

2. With Maggie, what is the new breakeven? Is this a realistic possibility? What should they do?

Answer 1

Break even in room night =(Fixed cost)/(contribution per room/night)

Contribution per room/night =(Revenue per room/night)-(Cost per room/night)

Revenue per room/night=$85

Number of room night last year =$30000/85=353

Cost of breakfast per room/ night =$3729/353=$10.56

Contribution per room/night=$85-$10.56=$74.44

Fixed cost last year=$34739-Maggie’s base alary=34739-7500=$27239

Break even last year =27239/74.44=366 room/night

Break even last year in room/night

366

Break even dollar last year =366*85=$31,110

Breakeven in dollar last year

$31,110

Actual number of room/ night last year=353

Actual number /night was less than Break even quantity (366)

Hence, they did not make profit last year.

Maximum room/night =6*365=2190

Breakeven room/night =366

Maximum profit that could be made =(2190-366)*Contribution/room/night=1824*Contribution/room/night

Contribution per room/night=$85-$10.56=$74.44

Maximum profit that could be made=1824*$74.44=$135,779

Maximum profit that could be made

$135,779

NEW BREAKEVEN WITH MAGGIE:

Contribution per room/night=$85-$10.56-Commission(beyond revenue of $25000)

Fixed costs =$34739

Number of room/night for revenue of $25000=25000/85=294

At Revenue of $25,000;

Contribution =294*$74.44= $21,885

Fixed Cost =$34739

Net Loss =21885-34739= -$12,854

Beyond $25,000revenue ,

Sales commission per room/night =35%*85= $29.75

Contribution/room/night=85-$10.56-$29.75=$44.69

Additional contribution required for Break even=$12854

Sales in room/night required beyond 294,

12854/44.69=288

Break even point in room/night =294+288=582

New Break even in room/night

582

Sales needs to increase from 366 to 582ie 59% increase.

Moreover availability of room will also decrease by 15%,because one room will be allotted to Maggie.

It does not appear possible.

They can either try advertisement campaign to increase occupancy, and if that does not work, may sell the business