Question

Morrison Hotel uses its banquet room to host parties, dinner dances, and business meetings. The hotel serves meals and provides a variety of services for each event. A local consultant analyzed recent cost data and estimated the total cost function per event to be as follows: Y = $1,000 + $9.00 x Assuming that Y represents total cost and x equals the number of guests, use this equation to answer the following questions:

a. If the hotel charges $25.00 per guest, how many guests must attend for the hotel to break even at each event?

b.  If the hotel charges $28.00 per guest, how many guests must attend for the hotel to break even at each event?

c..  If the hotel charges $28.00 per guest, would you advise this hotel to host events for 50 or fewer guests? Why or why not?

Durango Mountain Bike Company wants to open a bicycle repair shop in a suburb of a major metropolitan area. The industry association estimates that 20 percent of bicycles are repaired by similar service companies and that the average owner spends $100 per bicycle on maintenance each year. The census and local chamber of commerce data indicate that there are 10,000 bicycles in the county. Three other competitors exist within a twenty-five-mile radius of the proposed business location. Based on a consumer survey, the owners believe that they can capture 30 percent of the market in the first year of operation. Based on these data, address the following requirements:

a.  What is the potential number of bicycles likely to be commercially repaired?

b. What is the total potential bicycle repair revenue available in the market?

c. How much revenue can Durango Mountain Bike expect to generate?

Answer 1

1) a) If the holel charges $25 per guest, then the contribution per guest is :-

Contribution per guest = Hotel charge per guest - Variable cost per guest

= $25-$9 = $16 per guest

Break Even point at each event = Fixed Cost/Contribution per guest

= $1,000/$16 = 62.50 guests or 63 guests (rounded off )

b) If the holel charges $28 per guest, then the contribution per guest is :-

Contribution per guest = Hotel charge per guest - Variable cost per guest

= $28-$9 = $19 per guest

Break Even point at each event = Fixed Cost/Contribution per guest

= $1,000/$19 = 52.63 guests or 53 guests (rounded off )

c) The break even point at the hire charges of $28 per guest is 53 guests. The hotel should not host events for 50 or fewer guests because it will result in losses and company will not be able to recover its fixed cost.

2) a) Total no. of bicycles in country = 10,000

Estimated percentage of bicycles repaired in a year = 20%

Potential number of bicycles likely to be commercially repaired = 10,000 bicycles*20% = 2,000 bicycles

b) Total Potential bicycle repair revenue = 2,000 bicycles*$100 per bicycle

= $200,000

c) Durango Mountain Bike Share of Revenue = Total Potential bicycle repair revenue*Market Share

= $200,000*30% = $60,000