Kelly Hayes operates a bed and breakfast hotel in a beach re

Kelly Hayes operates a bed and breakfast hotel in a beach resort area of Noosa. Depreciation on the hotel is $60,000 per year. Kelly employs a maintenance person at an annual salary of $30,000 per year and a cleaning person at an annual salary of $24,000 per year. Rates and taxes are $10,000 per year. The rooms rent at an average price of $50 per person per night including breakfast. Other costs are laundry service at $4.00 per person per night and the cost of food which is $6.00 per person per night. Instructions: (a) Determine the number of rentals and the sales revenue Kelly needs to break even using the contribution margin technique. (4 marks) (b) If the current level of rentals is 4,000, by what percentage (Margin of Safety) can rentals decrease before Kelly has to worry about having a net loss? (2 marks) (c) Kelly is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $5.00 for food costs per person per night. Kelly feels she can increase the room rate to $65 per person per night. Determine the number of rentals and the sales revenue Kelly needs to break even if the changes are made. (6 marks)

Solution

A.  Fixed cost:
Depreciation $60,000
Salary - maintenance $30,000
Salary - cleaning $24,000
Rates and taxes $10,000
Total $124,000

Contribution margin:
Rental rate $50
Less: Laundry and food $10
Contribution margin $40

Break - even
Number of rentals:
$124000 / $40 = 3,100

In dollars:
$124000 / ($40/$50) $155,000

B. MARGIN OF SAFETY

Total sales-BEP Sales

4000-3100 = 900

C. Break even (Number of rentals)

Rental rate $65

Less:Laundry and food ($6+$5+$4) $15

Contribution margin $50

Break even (Number of rentals) = $124000/$50 = 2480

In Dollars

$124000/ ($50/$65) = 161,200