Using the high-low method, Regency Hotels estimates the total costs of providing

Question

Using the high-low method, Regency Hotels estimates the total costs of providing room service meals at $12,000 per month, plus 60 percent of room service revenue. a. What is the contribution margin ratio of providing room service meals? b. What is the break-even point for room service operations in terms of total room service revenue? c. What would you expect to be the total cost of providing room service in a month in which room service revenue amounts to $40,000? a. Contribution margin ratio b. Break-even service revenue c. Total cost

Explanation / Answer

a. Contribution margin ratio = 100% - 60% = 40%

b. Break-Even Service revenue = (Fixed Costs + Target Profit) / Contribution Margin Ratio = ($12,000 + $0) / 40% = $30,000

c. Estimated total room service costs in a month generating $40,000 room service revenue = Fixed element of room service costs + Variable element of room service costs

= $12,000 + ($40,000 × 60%)

= $36,000

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