Question

The Nordic Nest is a new luxury motel that has recently opened in the Canmore area. Management is currently doing an analysis to determine what the results would be in a number of different situations. You have been hired as a consultant to provide the required analysis and you have been provided with the following information to assist you in this task:

Desired net income…….$825,000

Annual fixed costs……$1,285,000

Average daily room rate….$175

Average variable cost per room occupied……$29.50

Number of rooms……..95

Days opened each year….365

Proposed rate per room…..$140

Average occupancy rate for March……80.0%

Required:

(A) Taking into consideration provide the following calculations and present the results as asked:

(i) How many rooms must be rented annually to achieve the desired net income?

(ii) What is the occupancy rate required (expressed as a percentage) to achieve the desired results in (i)?

(iii) How many rooms must be rented each day to achieve the desired results in (i)?

(B) Taking into consideration provide the following calculations and present the results as asked:

(i) How many rooms must be rented annually in order to break-even?

(ii) What is the occupancy rate required (expressed as a percentage) to achieve the desired results in (i)?

(iii) How many rooms must be rented each day to achieve the desired results in (i)?

(C) A sports group from Europe is traveling to Canmore to compete in the World Cup ice climbing competition in March of the coming year. The group has offered to rent the entire motel for the month of March at the proposed rate above. Taking in the average occupancy rate for March should their proposal be accepted? (Provide a comparative analysis, using relevant information only, showing the results if the proposal is accepted and if the proposal is rejected.)

Answer 1

The Nordic Nest - Analysis for achieving desired net income:

Please find answers to the above-stated questions as follows. Please give a thumbs up if you find answers useful!

A)

i) Rooms to be rented annually to achieve the desired net income:

Desired net income = $825,000

Average daily room rate = $175 per room

Desired Net Income = Revenue from Room Rent - Variable Cost - Fixed Cost

Let's denote No. of rooms rented as "R",

$825,000 = [ $175 X R] - [ $29.5 X R] - $1,285,000

$825,000 = 145.5R - $1,285,000

R = $2,110,000 / 145.5 = 14,501.71 ≈ 14,502 Rooms (Rounded off)

Rooms to be rented annually to achieve desired net income = 14,502 Rooms

ii) Occupancy rate:

Total available rooms during the year = 95 Rooms X 365 Days = 34,675 Rooms available

Rooms to be rented to achieve desired net income = 14,502 Rooms

Occupancy required = 14,502 / 34,675 X 100 = 41.82%

occupancy rate required to achieve the desired results = 41.82 %

iii) Rooms to be rented each day:

Available rooms per day = 95 Rooms

Required Occupany in terms of rooms = Rooms availabe per day X Occupancy rate required

= 95 X 41.82% = 39.73 ≈ 40 Rooms

Rooms must be rented each day to achieve the desired results = 40 Rooms

B)

i) Rooms to be rented annually to break-even:

At Break-even point profit or loss is zero. hence we shall put desired net income as zero to figure out break-even point.

Desired Net Income = Revenue from Room Rent - Variable Cost - Fixed Cost

Let's denote No. of rooms rented as "R",

0 = [ $175 X R] - [ $29.5 X R] - $1,285,000

0 = 145.5R - $1,285,000

R = $1,285,000 / 145.5 = 8,831.61 ≈ 8,832 Rooms (Rounded off)

Rooms to be rented annually to break-even = 8,832 Rooms

ii) Occupancy rate:

Total available rooms during the year = 95 Rooms X 365 Days = 34,675 Rooms available

Rooms to be rented to break-even = 8,832 Rooms

Occupancy required = 8,832 / 34,675 X 100 = 25.47%

occupancy rate required to break-even = 25.47 %

iii) Rooms to be rented each day:

Available rooms per day = 95 Rooms

Required Occupany in terms of rooms = Rooms availabe per day X Occupancy rate required

= 95 X 25.47% = 24.19 ≈ 25 Rooms* (Rounded upward as for 0.19 one more room will be rented)

Rooms must be rented each day to break-even = 25 Rooms

Note: As rooms can not be let out in part, in most calculation figures are rounded upward to a nearest full digit)