Question

1. The K&K Motel has 100 rooms and a swimming pool. Other activities such as vending machine sales and telephone sales are operated on a breakeven basis and may be ignored.

1. Compute the net income expected during June (a summer month) if 80% occupancy is achieved. (7 points)
2. Compute the breakeven point in the rooms sold during June. If 80% occupancy is achieved each night, on what day does the K&K break even? (2 points)
3. Compute the net income expected during November (a winter month) if 70% occupancy is achieved. (7 points)
4. Compute the breakeven point in the rooms sold during November. If 70% occupancy is achieved each night, on what day does the K&K break even? (2 points)

The K&K Motel has 100 rooms and a swimming pool. Other activities such as vending machine sales and telephone sales are operated on a breakeven basis and may be ignored.
					The cost structure of the K&K differs slightly by month based on season. The variable costs per occupied room are estimated as follows:
										Housekeeping	$     4.00
Operating supplies	$     2.00
Repair and maintenance	$     1.00
Utilities (summer)	$     0.50
Utilities (winter)	$     2.00
Pool/maintenance (summer)	$     0.50
Laundry	$     1.00
Fixed Costs per month are estimated as follows:
Housekeeping - supervision	$   2,000
Front office	$   3,000
Administration	$   6,000
Depreciation	$   5,000
Pool costs (summer)	$   2,000
Utilities	$   1,000
Insurance and other	$   2,500
Assume the average income tax rate is 30% of pretax income. The average daily rate of the K&K is estimated to be $35.00.

Answer 1

Solution:

84,000 a) Computation of Net Income in June at 80% Occupancy Income Statement Sales Revenue (80 Rooms * $35)* 30days Less: Variable Cost House keeping (80 Rooms * $4) *30 9,600 Operating Supplies 4,800 Repair and Maintenance 2,400 Utilities Summer 1,200 Pool Maintenance 1,200 Laundry 2,400 Total Variable Cost Contribution Margin Less: Fixed Costs Housekeeping Front office 3,000 Administration Depreciation Pool Costs 2,000 Utilities 1,000 Insurance and others 2,500 Total Fixed Cost Net Income 21,600 62,400 2,000 6,000 5,000 21,500 40,900 b) Computation of Break even days in June at 80% occupancy = Total Fixed Cost / Contrbution margin per day Break even Days = $21,500 / $2,080 = 10.34 Days or 11 days (Days can't be in fraction) Workings: Contribution Margin per day = Total contrbution Margin/ 30 days = $62,400 / 30 days = $2,080 per day