Question
Bob Newhart operates a bed and breakfast hotel in Vermont. Bob employs his longtime friend George Utley a caretaker all around fixit expert at an
Bob Newhart operates a bed and breakfast hotel in Vermont. Bob employs his longtime friend George Utley a caretaker all around fixit expert at an annual salary of $28,000. In addition, Bob employs college student Stephanie Vanderkellen who oversees housekeeping details at an annual salary of $20,000. A gourmet breakfast for guests at the hotel is provided by Larry, Darrell and Darrell an annual cost of $23,000. Real estate taxes are $8,825 per year, and depreciation on the hotel is $5,175 per year. The rooms rent at an average price of $49 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $3 per person per night and the cost of food which is $6 per person per night. Required: (a) Determine the number of rentals and the sales revenue Bob needs to break- even using the contribution margin technique. (b) If the current level of rentals is 4,250, by what percentage can rentals decrease before Bob has to worry about having a net loss? (c) Bob is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $4 for food costs per person per night. In addition, annual fixed costs will increase by $3,000. Bobs wife Joanna feels she can increase the room rate to $63 per person per night. Determine the number of rentals and the sales revenue Bob needs to breakeven if the changes are made.
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