Question

Jameson’s hotel group prepares published accounts on a quarterly basis. The senior management is reviewing the performance of one of the hotels in the group and making plans for 2018/19. They have in front of them the results for 2017/18 (based on actual results for the first two quarters and forecasts to the end of the year).

Quarter Sales Profit/(loss)
1 400,000 (280,000)

2 1,200,000 360,000

3 1,600,000 680,000

4 800,000 40,000

The total estimated number of visitors (guest nights) for 2017/18 is 50,000. The results follow a regular pattern, with no unexpected cost fluctuations beyond the seasonal trading pattern. Management intend to add to their plans for 2018/19 an anticipated increase in unit variable costs of 10% and a profit target for the hotel of $1 million.

Required: (a) Determine the total variable and total fixed costs of the hotel for 2017/18, by using both a PV chart and by calculation. (b) i. If there is no increase in visitors for 2018/19, what will be the required revenue rate per hotel visitor to meet the profit target? ii. If the required revenue rate per visitor is not raised above the 2018/19 level, how many visitors are required to meet the profit target? (c) Outline and briefly discuss the assumptions underlying the accountants’ typical PV or break-even analysis and assess whether they limit its usefulness.

Note: In order to achieve full marks for this question it is essential that you fully explain what you are doing, why you are doing it and the steps involved in providing a final solution. Ensure your answer is not just a set of calculations as 25% of the marks for this question are set aside for your explanation.

Answer 1

Solution (a)	Particulars	q1	q2	q3	q4	Total
	Sales	400000	1200000	1600000	800000	4000000
	Less:Variable Cost (sale * 0.20)	80000	240000	320000	160000	800000
	Contribution (sale * 0.80)	320000	960000	1280000	640000	3200000
	Less: fixed cost (b.f.)	600000	600000	600000	600000	2400000
	Profit	-280000	360000	680000	40000	800000
	notes:Calculation of PV ratio:	change in profit/change in sales
		360000-(-280000)/120000-400000
		0.8
	So, Pv ratio is 80%
Solution b) (i)	Existing rate per guest= total revenue / total visitors
	=4000000/50000
	=80
	Rate to be charged for earning 1 million profit
	Profit	1000000
	Add: Fixed cost	2400000
	Variable cost (800000+10%)	880000
	Total revenue to earn	4280000
	total guest	50000
	rate per guest (revenue/guest)	85.6
Solution b) ii)	no of visitors to meet target profit
	total revenue to earn	4280000
	rate per visitor	80
	no of visitors to meet target profit	53500