Question

Business plan for Guest house , describing about Fixed,variable and mixed cost with break even cost, an example describing about Guest house cost structure?

Answer 1

Fixed Cost are those cost which are fixed in nature irrespective about nature of operation or volume of operation fixed cost will remain unchange. In case of Guest house business plan Fixed cost can be rent of Guest house or if in lease then lease can be fixed cost. It does not matter wether we operate the guest house for a full year or half year or even for a single day, we have to pay the rent as per rent agreement only. So it does not depend upon volume of operation but remain fixed throughout the year. Example of fixed cost can be Rent, fixed salary of staff, Cook, Manager etc.

Variable cost are those cost which varies with the level of operation. This cost are dependent upon the Volume of operation. Say for example Cost of Cab for pick up and drop services of Guest. It depends upon the No of Guest we serve. Say in a month if we have 50 guest then the cost will be incurred on 50 bookings of cab but if in another month we dont have any Guest this cost will be 0.

Mixed Cost are the cost which is Fixed upto a certain level and then become variable after a certain level of Operation. It is the combination of both Fixed and variable. Say for example Electricity Rent, say for example if we consume upto 100 units the cost of electricity will be $500 and any unit beyond will be charged at $10 per unit. so we have 2 level of cost upto 100 unit fixed and then become variable.

Break even level is the level where our contribution become equivalent to Fixed cost. in simple language it the level of sales where we neither have any profit nor any loss.

Say for Example

We charge $1000 per booking of a luxurious guest house. During the Year we have 200 bookings.

The Variable Cost of Brevarages, foods, decorations and other Items will be $490 per bookings.

The fixed cost of Rent of Guest house per year will be $50,000 and other staff cost $10,000 during the year.

The cost of Electricity during the year is $10,000. Upto 1000 unit cost id $5000 and after that cost is $10 per unit. total unit consumed is 1500 unit.

So to calculate break even sales we ,

Break even sales = Total Fixed cost / Contribution per unit.

Total Fixed cost = ($50,000 +$10,000 +$5,000) i.e. $65,000

Contribution per unit = ( Revenue from booking - Cost ) Per unit i.e. ($1000 - $490 -$10) = $500

Break even sales = $65,000 / $500 i.e. 130 Bookins.

So If we have 130 booking a year we can recover all our cost and we will have neither loss nor any profit. Any Bookings above this will contribute in Profit.