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		$9,700	per month
Utilities		2,700	per month
Depreciation		1,300	per month
Maintenance		700	per month
Maid service		8	per room
Other costs		34	per room

New attempt is in progress. Some of the new entries may impact the last attempt grading.Your answer is incorrect.

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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New attempt is in progress. Some of the new entries may impact the last attempt grading.Your answer is incorrect.

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

1. Breakeven sales

Sales at which profit is zero. i.e., Contribution equals fixed cost

Analysis of costs

Particulars	Type of cost	Amount($)
-Salaries	Fixed cost	9700
-Utilities	Fixed cost	2700
-Depreciation	Fixed cost	1300
-Maintenance	Fixed cost	700
-Maid service	Variable cost	600 (8 per room * 75 rooms)
-Other costs	Variable cost	2550 (34 per room *75 rooms)

Particulars	Amount ($)
Revenue from Room	60
Less: Variable costs
-Maid service	(8)
-Other costs	(34)
Contribution per room	18

Fixed cost = 9700 + 2700 + 1300 + 700 = 14,400

(1) Break even point in number of rooms rented per month

= Fixed cost/Contribution per unit

= 14,400/18

= 800 rooms

(2) Breakeven point in dollars

= Break even point in rooms * room rent

= 800 * 60

= $ 48,000

2. Margin of Safety

Sales as per present attempt = 50 rooms per day * 30 days * $60 = $90,000

Break even sales = $48,000

(1) Margin of safety in dollars

= Present sales – Break even sales

= $ 90,000 - $ 48,000

= $42,000

(2) Margin of safety ratio

= Margin of safety in dollars/Present sales

= 42,000/90,000

= 46.67%