Harrison Hotels is considering adding a spa to its current facility in order to improve its list of amenities. Operating the spa would require a fixed cost of $21,630 a year. Variable cost is estimated at $36 per customer. The hotel wants to break even if 12,000 customers use the spa facility. What should be the price of the spa services?

$37.81

Explanation:

break even formula in units = total fixed costs / contribution margin

12,000 customers = $21,630 / contribution margin

contribution margin = $21,630 / 12,000 = $1.8025 ≈ $1.81 we must round up since one cent is the smallest value.

contribution margin = selling price - variable costs

$1.81 = selling price - $36

selling price = $36 + $1.81 = $37.81

If the hotel charges $37.81, the break even number will be 11,951 customers.

If the hotel charges $37.80, the break even number will be 12,017 customers.

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