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 $10,000 per year. The rooms rent at an average price of $60 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10 per person per night and the cost of food which is $5 per person per night. Determine the number of rentals and the sales revenue Jane needs to break even using the contribution margin technique.
Break-even number of rentals
Break-even sales $
If the current level of rentals is 4,000, by what percentage can rentals decrease before Jane has to worry about having a net loss?
Margin of safety %
Jane is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $3 for food costs per person per night. Jane feels she can increase the room rate to $68 per person per night. Determine the number of rentals and the sales revenue Jane needs to break even if the changes are made.
Break-even number of rentals
Break-even sales

Results are below.

Explanation:

First, we determine the total fixed costs and unitary variable cost:

Total fixed costs= 60,000 + 41,000 + 24,000 + 10,000

Total fixed costs= $135,000

Unitary variable cost= 10 + 5= $15

To calculate the break-even point in units and dollars, we need to use the following formulas:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 135,000 / (60 - 15)

Break-even point in units= 3,000 rentals

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 135,000 / (45/60)

Break-even point (dollars)=$180,000

Now, we can determine the margin of safety:

Margin of safety ratio= (current sales level - break-even point)/current sales level

Margin of safety ratio= (4,000 - 3,000) / 4,000

Margin of safety ratio= 25%

Sales can decrease by 25% before having a net loss.

Increase in unitary variable costs= $3

Increase in selling price= $8

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 135,000 / (68 - 18)

Break-even point in units= 2,700 rentals

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 135,000 / (50/68)

Break-even point (dollars)=$183,600

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