Exercise 19-1 The Soma Inn is trying to determine its break-even point. The inn

Question

Exercise 19-1 The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $60 a night. Operating costs are as follows. Salaries Utilities Depreciation Maintenance Maid service Other costs $10,600 per month 2,400 per month 1,500 per month 800 per month 8 per room 34 per room Determine the inn's break-even point in (1) number of rented rooms per month and (2) dollars. 1. Break-even point in rooms 2. Break-even point If the inn plans on renting an average of 50 rooms per day (assuming a 30-day month), what is (1) the monthly margin of safety in dollars and (2) the margin of safety ratio? (Round ratio to O decimal places, e.g.10.) 1. Margin of safety 2. Margin of safety ratio Question Attempts: 0 of 2 used All rights reserved

Explanation / Answer

Contribution Margin

Room rent $60

(-)Maid service ($8)

(-)Other Costs ($34)

Contribution margin per room $18

Contribution Ratio = ($ 18 / $ 60) * 100 = 30%

Fixed Costs = Salaries + Utilities + Depreciation + Maintenance

= 10600 + 2400 + 1500 + 800

= $ 15,300

1.Break-Even point in Rooms

= Fixed Cost / Contribution margin per room

= $15300 / 18

= 850

2.Break-Even point (in Dollars)

= Fixed Cost / Contribution margin ratio

= $15300 / 30%

= $ 51,000

Margin of safety

Expected rental revenue = 1,500 rooms x $60 = $90000

Margin of safety in dollars = $90000 - $51000 = $ 39,000

Margin of safety ratio =[ $ 39000 / $ 90000 ]* 100 = 43.33%

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