Question

Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan. Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual salary of $41,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,700 per year. The rooms rent at an average price of $128 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10.7 per person per night and the cost of food which is $5.1 per person per night.

A) Determine the sales revenue Jane needs to break even.

B) Determine the number of rentals Jane needs to earn a target net income of $50,000.

C) Jane is considering changing the business strategy. She considers installing additional cleaning machines which will decrease laundry and cleaning service per person per night by $3. However, fixed depreciation cost will increase by $4,010. Determine the number of rentals Jane needs to break even if the changes are made.

D) Determine the number of rentals at which Jane would be indifferent between the current and proposed business models. (Hint: Consider net income figures.)

Answer 1

A)

Revenue per person per night=$128

Variable Costs per person per night:

Laundry and Cleaning Service =$10.7

Cost of food=$5.1

Total Variable cost per person per night=10.7+5.1=$15.8

Unit Contribution margin =128-15.8=$112.2

Fixed Costs per Year:

Depreciation=$60000

Maintenance Salary=$41000

Cleaning Salary=$24000

Taxes=$10700

Total annual fixed costs=60000+41000+24000+10700=$135,700

Break Even Point in person night=Fixed Cost/Unit Contribution margin=135700/112.2=1210 person night

Break Even Sales(Per Year) =1210*128=$154,880

B) Target net Income =$50,000

Break even number of Rentals=1210

Contribution margin per rental=$112.2

Number of Rental required =1210+(50000/112.2)=1655

C) New Unit Contribution Margin=$112.2+$3=$115.2

New Annual Fixed Costs=$135,700+$4010=$139,710

Number of rentals to Break Even =Fixed Costs/Unit Contribution margin=139710/115.2=1213

D)Assume the indifferent number of rentals =N

Profit as per current model =(N-1210)*112.2

Profit as per proposed model =(N-1213)*115.2

To be indifferent:

(N-1210)*112.2=(N-1213)*115.2

N*(115.2-112.2)=1213*115.2-1210*112.2=3975.6

N*3=3975.6

N=3975.6/3=1325 (Rounded to whole number)

Number of required rentals=1325