Question

'Break even analysis

You own a 10 bedroom hotel

With the following prices:

$ 12,000 per month mortgage payment

   $ 4,000 per month for the gardener and housekeeper

   $   9.00 per room for soap, towels etc.

   $ 20.00 per room desired Net Profit

Assume a 30 day month

SOLVE FOR THE FOLLOWING:

1.   The selling price per room per night AND the monthly breakeven point.

2.   The monthly breakeven point if you raise the selling price calculated in question 1

       above by $12.00.

3. The monthly breakeven point if you lower the selling price calculated in question 1   

      above by $3.00.

4. Which of the 3 prices would you charge? What factors should you consider?

5. What would your selling price and breakeven point be if you want to pay

      yourself $50,000 per year?

Answer 1

Fixed Costs: Fixed costs refer to those costs, that do not change with the change in the Production.

In the given case, mortgage payment and payments for gardener and housekeeper do not change with the change in number of rooms. Hence, they are considered as Fixed costs.

Variable Costs: Variable costs refer to the costs that change with the change in the unit of Production.

In the given case, payments for soap, towels etc. depend on the number of rooms, hence they are considered as variable costs.

Given:

No of rooms = 10

Mortgage Payment= $ 12,000 per month

Payment for the gardener and housekeeper = $ 4,000 per month

Soap, towels etc. = $   9.00 per room

Desired Profit = $ 20.00 per room

Assuing a 30-day month:

Total Fixed costs Per month = Mortgage Payment + Payment for Gardener and Housekeeper

Total Fixed costs =12,000 + 4,000 =$ 16,000

Total Variable Costs = $   9.00

When Fixed costs are spread across all the 10 rooms, we get Fixed Costs per room as follows:

Fixed costs per room = Fixed costs per day / No of rooms

Fixed costs per day= Total Fixed costs / No of days = 16,000/30 = $ 533.33

Fixed costs per room = 533.33/10 = 53.33

Total Cost per room = Fixed cost per room + Variable Cost per room = 53.33 + 9 = 62.33

Profit = Total Costs - Selling Price

Hence, Selling Price = Profit + Total Costs = 20 + 62.33 = $ 82.33

Selling price per room = $ 82.33

Break- even point can be calculated using below formula:

Hence, Break-even point = 218

Solution 2:

The monthly breakeven point if you raise the selling price calculated in question 1 above by $12.00=?

New Selling Price = Sellin Price (From solution 1) + $ 12

New Selling Price = 82.33 + 12 = $ 94.33

Let us now calculate the break-even point

Hence, Break-even point is 188 (Rounded off to next best figure)

Solution 3:

The monthly breakeven point if you lower the selling price calculated in question 1 above by $3.00=?

New Selling Price = Selling Price (From Solution 1) - 3

New Selling Price = 82.33 - 3 = 79.33

Let us now calculate the Break-even point

Hence, Break even point = 228 (Rounded off to next best figure)

Solution 4:

Case 1: Selling Price = 82.33, Break-even = 218

Case 2: Selling Price = 94.33, Break-even = 188

Case 3: Selling Price = 79.33, Break-even = 228

The Selling price of 94.33 would result in more profits and break-even is also achived by the sale of 188 units lowest of the three, hence I would prefer Case 2 i.e. Selling Price = 94.33 and Break-3v3n =188. (This decision is considering all other figures like the Demand are not affecting by this decision)

Solution 5:

Considering the additional payment of $ 50,000 per year:

Fixed costs would increase in this case.

Fixed cost increment per month = 50,000 / 12 = $ 4166.67

New Fixed Costs = Fixed costs + $ 4166.67

New Fixed Costs = 16,000 + 4166.67

New Fixed Costs = 20,166.67

New Fixed costs per room = New Fixed costs / (No of Days * No of rooms)

New Fixed Costs per room = 20,166.67 * (30*10)

New Fixed costs per room = $ 67.22

Hence, Total costs per room = Variable cost + New Fixed cost = 9 + 67.22 = 76.22

Selling Price = Profits + Costs = 20 + 76.22 = 96.22

Selling Price = $ 96.22

Hence, Break-even point in this case = 231 (Rounded off to the nearest figure)