The condensed income statement of the Aria Hotel (AH) is as follows: Variable co
ID: 2510993 • Letter: T
Question
The condensed income statement of the Aria Hotel (AH) is as follows:
Variable costs
Fixed costs
Department Income
Gift Shop
Total department income
Other variable expenses*
Other fixed costs**
Pretax income
Income taxes
Net income
*Management fees and rent expense vary with rooms revenue.
**Includes depreciation of $800,000.
Compute the AH’s weighted average CMR. Consider all variable costs.
AH’s total revenues =
5000000+2000000+200000+400000= 7,600,000
AH’s total variable costs =
1000000+800000+200000+150000+950000= 3,100,000
AH’s total fixed costs =
AH’s weighted average CMR (CMRw) =
7600000-3100000/ 7600000= 0.59
Compute the AH’s breakeven point.
4000000/0.59= 6779661.02
If the AH desires to earn (net income) $500,000, what must its total food sales equal? (Assume the sales mix is constant).
Tax rate =
Ib (Pretax Income) =
Total sales =
Food sales =
revenueVariable costs
Fixed costs
Department Income
room 5000000 1000000 500000 3500000 food 2000000 800000 500000 700000 communications 200000 100000 100000 (100000)Gift Shop
400000 150000 100000 150000Total department income
4250000Other variable expenses*
950000Other fixed costs**
2800000Pretax income
500000Income taxes
100000Net income
400000Explanation / Answer
Solution:
Desired net income = $500,000
Tax rate = $100,000 / $500,000 = 20%
Desired pre tax income = $500,000 / 80% = $625,000
Total fixed cost = $4,000,000
Desired contribution = $625,000 + $4,000,000 = $4,625,000
Contribution margin ratio = 0.59
Required total sale to earn net income of $500,000 = Desired contribution / contribution margin ratio
= $4,625,000 / 0.59 = $7,838,983.05
Food sales = $7,838,983.05 * $2,000,000 / $7,600,000 = $2,062,890.28
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