Question

The Tired Traveler Motel rents rooms for $50 per night. The variable cost per room rental is $10. The company incurs $300,000 of fixed costs per year. The company expects to rent 10,000 rooms in the coming year. a. Based on these data, prepare a static budget for the coming year. b. Holding all other factors constant, how would net income differ from the static budget if sales price was 10 percent lower than expected?
c. Holding all other factors constant, how would net income differ from the static budget if sales volume (number of room rentals) was 10 percent lower than expected?
d. Holding all other factors constant, how would net income differ from the static budget if variable costs were 10 percent higher than expected?
e. Holding all other factors constant, how would net income differ from the static budget if fixed costs were 10 percent higher than expected? f. Which scenario (b, c, d, or e) would result in the lowest net income?

Answer 1

a.                           Static Budget of The Tired Traveler Motel

Heads	Static Budget
Expected Revenue from Room Rent (10,000 rooms@ $50 each)	$500,000
Expected Standard Costs Applicable
Expected Variable Cost (10,000 rooms @ $10each)	$100,000
Expected Fixed Cost	$300,000
Expected Income fromOperation(500,000-100,000-300,000)	$100,000

b.If sale price was 10 percent lower than the expected then net income decreases by $ 50,000. from Static budget.

New Sale Price = $ 45 Per Night.

Heads	Amount
Revenue from Room Rent (10,000 rooms@ $45 each)	$450,000
Standard Costs Applicable
Less :-Variable Cost (10,000 rooms @ $10each)	($100,000)
Less :- Fixed Cost	($300,000)
Income fromOperation(450,000-100,000-300,000)	$50,000

c.If sales volume is 10 percent lower than the expected then net income decresed by $ 50,000 from static budget.

Number of Rooms Now rented = 9,000

Heads	Amount
Revenue from Room Rent (9,000 rooms@ $50 each)	$450,000
Standard Costs Applicable
Less :- Variable Cost (10,000 rooms @ $10each)	($100,000)
Less :-Fixed Cost	($300,000)
Income fromOperation(450,000-100,000-300,000)	$50,000

d.If Variable cost is 10 percent more than the expected then net income decreased by $ 10,000 from static budget.

New Variable Cost = $ 11 per room

Heads	Amount
Revenue from Room Rent (10,000 rooms@ $50 each)	$500,000
Standard Costs Applicable
Less :- Variable Cost (10,000 rooms @ $11each)	($110,000)
Less :-Fixed Cost	($300,000)
Income fromOperation(450,000-100,000-300,000)	$90,000

e. If Fixed Costs is 10 percent Higher than the static budget then Net Income decreased ny $ 30,000 tan the static budget.

New Fixed Cost = $330,000

Heads	Amount
Revenue from Room Rent (10,000 rooms@ $50 each)	$500,000
Standard Costs Applicable
Less :- Variable Cost (10,000 rooms @ $10each)	($100,000)
Less :-Fixed Cost	($330,000)
Income fromOperation(450,000-100,000-300,000)	$70,000

.

f. Scenario B and C both both would result in lowest net income of $ 50,000 as comparing to two other Scenario.