Question

• The following information is for Winter Break Hotel. Given the information, questions from #14 to #16.
o Average room selling price: $65
o Average variable cost per room: $17
o Annual total fixed costs: $450,000
o Sales goal (= Net Income) of the hotel this year: $5,000,000
o Number of rooms available per day: 400 rooms
o This hotel is open 365 days a year.

What is the occupancy percentage required to reach the sales goal? (Round to the second decimal place.)

A. 23.43%

B. 9.46%

C. 23.65%

D. 77.77%

For every $1 of sales, how much can this hotel use to pay on fixed costs or to generate profits?

A. $2.82

B. $.82

C. $.26

D. $.74

If this hotel experiences an increase in its fixed cost by $35,000 this year, how many additional rooms must be sold to absorb this increase? (Round up to the nearest whole number.)

A. 730 rooms

B. 21,722 rooms

C. 727 rooms

D. 11,667 rooms

Answer 1

1) Occupancy percentage required to reach sales goal

Option D = 77.77 % Is Correct

Selling Price per Room (S.P per unit) = $ 65

Variable Cost per Unit (V.C per Unit) = $ 17

Contribution Margin Per Unit (C.M per Unit) = S.P per Unit - V.C per unit

C.M per Unit = $65- $17 =$ 48

Annual Fixed Cost = $ 450,000

Desired Net Profit = $ 5,000,000

Number of rooms available per day = 400 rooms

Total Number of Room available per Year = 400 *365 = 146,000 Rooms

Number of Rooms Need to Sell to Acheive Desired Profit = (Fixed Cost + Desired Profit) / C.M per Unit

   ( $450,000 + $5,000,000) / $ 48 = 113541.667 = 113,542 Rooms

Occupancy percentage to reach sales Goal =

No.of Rooms need to achieve Desired Profit / Total No.of Rooms Available per year

113,542 / 146,000 = 0.77768 = 77.77 %

2) For every $1 of sales, how much can this hotel use to pay on fixed costs or to generate profits?

Option D = $0.74 is Correct

This Question ask about contribution margin ratio. Contribution margin represent earnings available to recoup fixed cost or to generate profit.  

Contribution margin ratio = Contribution Margin per Unit / Sales Price per Unit

It shows us how much contribution is generated from each dollar of sales to recoup fixed cost as well as to generate profit

C.M per Unit = $ 48 (Calculated earlier)

S.P per Unit = $ 65

Contribution Margin ratio = 48 / 65 =0.7384 = 74 %

So $ 1 of sales provides it's 74% to Contribution Margin for recoup fixed cost or to generate profit

$1 * 74% = $ 0.74

3) Additional rooms need to absorb additonal fixed cost of $35000

Option A = 730 is correct

Additional rooms need to absorb addtional Fixed Cost = Additional Fixed Cost / C.M per unit

C.M per Unit = $48

Additional Fixed Cost = $35,000

$35000 / $48 = 729.16 =730 Rooms