Question

Profit E18-9 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 Utilities Depreciation Maintenance Maid service Other costs $5,900 per month $1,100 per month $1,000 per month $100 per month $14 per room $28 per room Instructions Determine the inn's break-even point in (a) number of rented rooms per month and (b) dollars.

Answer 1

Fixed cost per month = Salaries + Utilities + Depreciation + Maintenance

= 5,900+1,100+1,000+100

= $8,100

Variable cost per room = Maid service + Other service

= 14+28

= $42

Selling price per room = $60

Contribution margin per room = Selling price per room - Variable cost per room

= 60-42

= $18

Break even point ( in units) = Fixed cost/Contribution margin per room

= 8,100/18

= 450 room

Contribution margin ratio = Contribution margin per room/Selling price per room

= 18/60

= 30%

Break even point ( in dollars) = Fixed cost / Contribution margin ratio

= 8,100/30%

= $27,000

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