Question

A resort hotel annual sales revenue of $1,000,000, Variable costs of $350,000, and a fixed costs of $570,000. The fixed costs include $80,000 a year for land rental lease.

a) Calculate the hotel's breakeven point.

b) If the owners had an equity investment in the hotel of $1,200,000. What level of sales revenue is required for an operating income (BT) representing a 15% return on their investment?

c). In a renegotiation of the land lease, the landowner has offered management an alternative to the fixed lease currently being paid. The alternative in the lease currently being paid. The alternative is 10% of the resort's contribution margin.

i. If management accepts this proposal, what would be the resort hotel's new breakeven point?

ii. Calculate the indifference point.

iii. Explain whether management should accept this proposal. if next year's total sales revenue is expected to be $1,200,000?

iv. Should management accept this proposal if next's total sales revenue is expected to be $1,400,000

.:PS. I need all the C ( this includes " i " ; " ii " ; " iii " & " iv "

Answer 1

(a)

Breakeven point = Fixed Cost / Gross margin

= $570,000 / 65%

= $876,923.08

Calculation of Gross margin =Gross Margin / Sales (Gross Margin = Sales Revenue - Variable Cost)

= ($1,000,000 - $350,000) / $1,000,000

= $650,000 / $1,000,000

= 65%

(b)

Sales Revenue require to earn 15% = (Fixed cost + Require Income) / Gross Margin

= ($570,000 + $180,000) / 65%

= $750,000 / 65%

= $1,153,846.15

Require Income = $1,200,000 x 15% = $180,000

To earn 15%, Sales revenue required will be $1,153,846.15

(c)

(i) Breakeven point If management accept offer

Breakeven point = Fixed Cost / Gross margin

= $490,000 / 58.5%

= $837,606.84

Fixed cost = $570,000 - Fixed Lease rent = $570,000 - $80,000 = $490,000

Gross Margin = 65% - New lease rent % (10% of gross margin) = 65% - (65% x 10%) = 65% - 6.5% = 58.5%

Break even sales revenue = $837,606.84

(ii) Indiffence point

Indiffernce point is ,when new rent and old rent payment are same i.e. $80,000

Let assume sales revenue is A so rent is 0.065 A ( A x 10% of margin = A x (65% x 10%) = A x 6.5% = 0.065A)

Means new rent = 6.5% of sales revenue

So,

Indifferance point, Old rent = Sales revenue x 6.5%

$80,000 = Sales Revune x 6.5%

Sales Revenue = $80,000 / 6.5%

Sales Revenue = $1,230,769.23

or $80,000 = 0.065A so A= $1,230,769.23

Indifferance point will be $1,230,769.23 sales.

(iii)

If expected sales revenue $1,200,000

Particular	Amount
Sales Revenue	$        1,200,000
Gross Margin @ 65%	$            780,000
Lease rent 10% of Gross Margin	$              78,000

If management expcted total sale revenue for next year to be $1,200,000 then advisable to accept the proposal as it decrease the lease rent outflow by $2,000. ($80,000(old) - $78,000(new))

(iv)

If expected sales revenue $1,400,000

Particular	Amount
Sales Revenue	$        1,400,000
Gross Margin @ 65%	$            910,000
Lease rent 10% of Gross Margin	$              91,000

If management expcted total sale revenue for next year to be $1,400,000 then advisable to not accept the proposal as it increase the lease rent outflow by $11,000. ($91,000(new) - $80,000(old))

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