Question

The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $52 a night. Operating costs are as follows. Salaries $5,250 per month Utilities 2,100 per month Depreciation 1,500 per month Maintenance 900 per month Maid service 7 per room Other costs 32 per room.

Determine the inn’s break-even point in (1) number of rented rooms per month and (2) dollars.

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? (Round ratio to 0 decimal places, e.g. 10%.)

Answer 1

Answer -

Contribution Margin per room:

Room rent $52
(-) Maid service ($7)
(-) Other Costs ($32)

Contribution margin per room = $13

Contribution Ratio = ($13 / $52) * 100
                               = 25%
Fixed Costs:
= Salaries + Utilities + Depreciation + Maintenance
= $5,250 + $2,100 + 1,500 + 900
= $9,750

1. Break-Even point in Rooms
= Fixed Cost / Contribution margin per room
= $9,750 / 13
= 750

2. Break-Even point (in Dollars)
= Fixed Cost / Contribution margin ratio
= $9,750 / 25%
= $39,000

Margin of safety :
Expected rental revenue = 50 * 30 * $52
                                          = $78,000
Margin of safety in dollars = $78,000 - $39,000
                                            = $ 39,000
Margin of safety ratio = [ $39,000 / $78,000 ] *100
                                    = 50%