Question

The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $ 60 a night. Operating costs are as follows.

Salaries		$ 11,800	per month
Utilities		2,100	per month
Depreciation		1,500	per month
Maintenance		800	per month
Maid service		8	per room
Other costs		34	per room

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

1.		Break-even point in rooms
2.		Break-even point		$

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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.)

1.		Margin of safety		$
2.		Margin of safety ratio			%

Answer 1

Salaries	$ 11,800
Utilities	$    2,100
Depreciation	$    1,500
Maintenance	$        800
Total fixed costs	$ 16,200

Maid service	$    8
Other costs	$ 34
Total variable costs	$ 42

a1.

Breakeven point in units = Total Fixed costs / Contribution margin per unit

Breakeven point in units = $16,200 / ($60-$42)

Breakeven point in Miles = 900 Rooms

a2.

Break Even Sales in Dollars = Break even point in unit * Price per unit

Break Even Sales in Dollars = 900*$60

Break Even Sales in Dollars = $54,000

b1.

Margin of safety = Actual Sales - Break even point sales in dollars

Margin of safety = (50*30*$60) - $54,000

Margin of safety = $36,000

b2.

Margin of safety ratio = Margin of safety / total sales

Margin of safety ratio = $36,000 / $90,000

Margin of safety ratio = 40%

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