Question

Question 1

Rick’s Motel has the following monthly costs in the first five months of 2019:

Month                    Rooms Rented                  Costs

January                            150                        $20,250

February                           160                          21,000

March                               130                          18,750

April                                 144                          19,800

May                                  170                          21,750

Instructions

a.    Identify the fixed and variable cost elements using the high-low method.

b.    The hotel management is doing a projection for June 2019. How many rooms should be rented out in order to break even, if the charge is $150 per room rented?

Answer 1

	Rooms Rented	Costs
High level of activity	170	$21,750
Low level of activity	130	$18,750
Change	40	$3,000
Variable Cost per room rented=$3,000 / 40 rooms =$75 per room rented
Fixed cost element =$21,750 - (170*$75) =$9,000
Fixed cost element =$9,000
Charge per room rented	$                      150
Less:Variable cost per room rented	$                        75
Contribution margin per room rented	$                        75
Fixed Cost	$                   9,000
Break-even rooms($9,000/$75)	120 rooms