E5-9 Compute break-even point The Palmer Acres Inn is trying to determine its br

Question

E5-9 Compute break-even point The Palmer Acres Inn is trying to determine its break-even point during its off-peak season. The inn has 50 rooms that it rents at $60 a night. Operating costs are as follows. Salaries $5,900 per month Utilities $1,100 per month Depreciation $1,000 per month Maintenance $100 per month Maid Service $14 per room Other costs $28 per room Instructions Determine the inn's break-even point in (a) number of rented rooms per month and (b) dollars. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" . When you have completed E5-9, consider the following additional question. 1. Assume that total fixed costs changed to $8,750 per month and the rental rate per room for a night changed to $65. Show impact of these changes have on the calculations. E5-9 Compute break-even point The Palmer Acres Inn is trying to determine its break-even point during its off-peak season. The inn has 50 rooms that it rents at $60 a night. Operating costs are as follows. Salaries $5,900 per month Utilities $1,100 per month Depreciation $1,000 per month Maintenance $100 per month Maid Service $14 per room Other costs $28 per room Instructions Determine the inn's break-even point in (a) number of rented rooms per month and (b) dollars. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

Explanation / Answer

E5-9. (a) Break-even in number of rented rooms per month

Variable costs per room = Maid service $14 + Other costs $28 = $42 per room

Fixed costs per month = Salaries $5900 + Utilities $1100 + Depreciation $1000 + Maintenance $100 = $8100

Contribution per room = Rent per room $60 – Variable costs per room $42 = $18

Break-even number of rented rooms per month = Total Fixed costs / Contribution per room = $8100 / $18 = 450

(b) Break-even point in dollars

Contribution margin ratio = Contribution per room / Rent per room = $18 / $60 = 30%

Break-even point in dollars = Total Fixed expenses / Contribution margin ratio = $8100 / 30% = $27000

1. Break-even in number of rented rooms per month

Fixed costs per month = $8750

Contribution per room = Rent per room $65 – Variable costs per room $42 = $23

Break-even in number of rented rooms per month = Total fixed costs / Contribution per room = $8750 / $23 = 380.43

Break-even in dollars = 380.43 x $65 = $24728

The break-even is reduced due to the impact of the changes in the fixed costs and rent per room.

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