Question

You have been given the following information about a motel for the coming year:                                                  

(A)            Occupancy Forecast         75%

(B)            Rooms department variable cost per occupied room is estimated to be     $7.75                                       

(C)            Owners' investment          $800,000

(D)            Desired after tax yield on owners' investment        15%

(E)             Current income tax rate                  30%

(F)             The motels fixed costs for the coming year were anticipated to be                 825,000                                  

(G)            The motel has this many rooms available to rent     100

(H)            Days opened each year    365

REQUIRED:                                                                                                                                         

1. Calculate the Annual Revenue required to reach the desired after-tax yield on the owner's investment
2. Calculate the Number of Occupied Rooms required to achieve the PROFIT objective.
3. Calculate the Average Room Rate required to achieve the PROFIT objective.                              
4. Created a legend of key monetary items
5. Provide a schedule of fixed costs
6. Provide your answer in Contribution Margin Format        
7. Make sure you provide brief detail on how you arrived at REQUESTED key numbers.                               

                                                                                                           

Answer 1

Answer :

1. Owner's Investment = $ 800,000

2. Required After Tax Yield by owner = 15%

3. Therefore Required Yield = $ 800,000 x 15% = $ 120,000

4. Total Pre-Tax Profit required to be generated = Required Yield/(1 - Tax Rate) = $ 120,000/(1-30%) = $ 171,429

5. Required Pretax Profit per room per day per occupancy Forecast = $ 171,429/(100 x 365 x 75%) = $ 6.27

6. Fixed Cost = $ 825,000

7. Fixed Cost per room per day per occupancy Forecast = $ 825,000/(100 x 365 x 75%) = $ 30.14

8. Variable Cost per room per day = $ 7.75

9. Required Annual Revenue for required Yield = (Required After Tax Yield per room + Fixed Cost per room + Variable Cost per room ) x No. of Rooms x No. of Working Days x Occupancy Forecast

= $ 44.16 x 100 x 365 x 75% = $ 1,208,880

10. No. of Occupied rooms required to achieve the profit = No. of Rooms x Working Days x Occupancy Forecast = 100 x 365 x 75% = 27,375 rooms

11. Therefore Average Room Rate Required = Required Revenue divided by (No. of Rooms x No. of Working Days x Occupancy Forecast) = $ 1,208,880/(100 x 365 x 75%) = $ 44.16

12. Contribution Margin Format is as follows :

Particulars	Per Room	For the Period
Revenue	$         44.16	$ 1,208,880
Less: Variable Cost	$           7.75	$            212,156
Contribution Margin	$         36.41	$            996,724
Less: Fixed Cost		$            825,000
Profit		$            171,724

Note :

a. These two sub-questions cannot be answered since no information is provided.

1. Created a legend of key monetary items
2. Provide a schedule of fixed costs

b. No Room Rent information is given in the question - i.e. information is missing. Hence Revenue can only be calculated on the basis of information provided, i.e. elements of Cost nd Profit.