Skyview Manor

Topics: Variable cost, Contribution margin, Fixed cost Pages: 12 (1069 words) Published: April 24, 2014
Question 1— On average, how many rooms must be rented
each night in season for the hotel to breakeven?

Calculating the break-even occupancy level requires splitting the costs in Exhibit 1 into the fixed and variable components:
a) Variable Costs:
Cleaning supplies
$ 1,920
Linen service
$13,920
1/2 Misc. expense
$ 3,657
$19,497
b) Per Occupied Room Night = $19,497 ÷ 7,680 (120 80 80%)
= $2.54
c) Contribution Margin:
Average revenue $160,800 ÷ 7,680 = $20.94
Revenue - Variable Cost = $20.94 -$2.54 = $18.40
d) Fixed Costs:
Total Costs - Variable Costs = Fixed Costs
$138,410 - $19,497 = $118,913
e) Break Even = $118,913 / $18.40 = 6,463 room nights
Per night (÷ 120) = 54 rooms (68% occupancy)

Skyview 1

Skyview 2

Question 2 — The hotel is full on weekends in the ski season. If all room rates were raised $5 on weekend nights, but occupancy fell to 72 rooms instead of 80, what is the revised profit before taxes for the year, per Exhibit 1?

The easiest way to make the calculation is to calculate the change in Contribution Margin (CM) since fixed costs will not change.
Lost CM
8 rooms 34 weekend nights (120 2/7 = 34) $18.40 = $5,005.
Added CM
72 rooms 34 nights $5 = $12,240.
Net Change
$12,240 - $5,005 = $7,235 more profit (before tax)
The breakeven number for lost rooms per night is give by:
X = Breakeven lost rooms
X  •  $18.40  =  (80  - X) $5
$18.4X + $5X = $400
$23.4X = $400
X = 17

The price increase is a good idea as long as we can rent at least 63 rooms per weekend night.

Question 3 — Contribution Margin in the Off Season
1) Revenue
Single = $10, Double = $15, weighted average = $14.
2) Variable Cost, from question 1 = $2.54/room night
3) Contribution Margin
Revenue - Variable Cost = #14 - $2.54 = $11.46/room night

Skyview 3

(2)

(5)

(4)

No

(7)

(6)

Yes
Bubble
Yes

Pool

(3)

No

Do nothing.
Stay open—no advertising—no pool
Stay open—advertise—no pool
Stay open—no advertising—pool only
Stay open—advertise—pool only
Stay open—no advertising—pool and bubble
Stay open—advertise—pool and bubble

Question 4 — The Options
1.
2.
3.
4.
5.
6.
7.

No
Advertise

Yes

Skyview 4

$2000

Repair

$500

Insurance
(a)
$4200

Mrs. K

$4000

Adv.

Pool
Dep'n
(b)
$5000

Incremental Fixed Expenses

1. Status Quo

DECISION
ALTERNATIVE
Total
0
$15,415 2. adv no, pool no
$19,415 3. adv yes, pool no
$24,615 4. adv no, pool yes,
bubble no
$28,615 5. adv yes, pool yes
bubble no
$32,215 6. adv no, pool yes
bubble yes
$36,215 7. adv yes, pool yes
bubble yes

Bubble
Dep'n
(c)
$3000

(e)
$720

Pool Ex. Phone
(d)
4200 or
8800

Elect.

(g)
4320

Maids

Skyview 5

(f)
$3675

(a)
(b)
(c)
(d)

35 weeks x $100/week @ $3500 x 1.2 = $4200
25000/5 = $5000
15000/5 = $3000
Pool expense, if only open off season,
and no bubble=
Lifeguard (3x400)= $ 1200
Insurance & Taxes 1200
Maintenance
1800 $4200
Pool expense if opened year round
with bubble =
From above
$ 4200
Additional Lifeguard 3600
Heating
1000 $8800

(e) (30 rooms) ($3 per room) = $90 x (8 months) = $720

(f) Total Utility Cost, from the case $6360
less Phone Expense
$(1560) = [(290x4) + (50x8) = $1,560]
= Electricity Expense
$4800 (for 9600 available rooms)
For 7350 available rooms = 7350/9600 x $4800 = $3,675

Skyview 6

(g) We pay four maids during the season for 7,680 occupied nights (120x80x.8) which is 1920 rooms per maid. Each maid cleans 16 rooms (average) during the week and 20 rooms on the weekend. With only 30 rooms open off-season and only 40% maximum occupancy expected—12 rooms—only one extra maid is needed. The cost is $15/day x 240 days = $3600; $4320 with fringes.

Question 5 — Break-even Occupancy Rates
Decision Alternatives (same order as for Q2 and Q3)

6)

5)

4)

3)

2)

1)

36215/11.46 = 3160

32215/11.46 = 2811

28615/11.46= 2497

24615/11.46 = 2148...
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