Question

Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan. Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual salary of $32,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,000 per year. The rooms rent at an average price of $60 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10 per person per night and the cost of food which is $5 per person per night.

Instructions (a) Determine the number of rentals and the sales revenue Jane needs to break even using the contribution margin technique.

(b) If the current level of rentals is 3,500, by what percentage can rentals decrease before Jane has to worry about having a net loss?

(c) Jane is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $3 for food costs per person per night. Jane feels she can increase the room rate to $66 per person per night. Determine the number of rentals and the sales revenue Jane needs to break even if the changes are made.

Answer 1

Rent revenue per person per night		60
Variable Expenses:
Laundry and cleaning services		10
Food expenses		5
Total Variable Expenses		15
Contribution Margin		45
Contribution Margin Percentage		75.00%
Fixed Expenses
Depreciation Expense		60,000.00
Salaries Expense		56,000.00
Real estate taxes		10,000.00
Total Fixed Expenses		126,000.00
a) Break even point in units (rentals)	Total Fixed Expenses/Contribution Margin	2,800.00
a) Break even point in dollars	Total Fixed Expenses/Contribution Margin percentage	168,000.00

b) Anything below break even rentals i.e. 2800 will be a net loss for Jane. So, decrease in rental from 3500 to 2800 = 700

Percentage decrease in rental = 700/3500 i.e. 20%. So 20% decrease from the current rental of 3500 will be a net loss for Jane

c)  

Rent revenue per person per night		66
Variable Expenses:
Laundry and cleaning services		10
Food expenses		8
Total Variable Expenses		18
Contribution Margin		48
Contribution Margin Percentage		72.73%
Fixed Expenses
Depreciation Expense		60,000.00
Salaries Expense		56,000.00
Real estate taxes		10,000.00
Total Fixed Expenses		126,000.00
Break even point in units	Total Fixed Expenses/Contribution Margin	2,625.00
Break even point in dollars	Total Fixed Expenses/Contribution Margin percentage	173,250.00