Cost-volume-profit

Part A

The Soundsthatcantbemade Hotel has annual fixed costs of $3,000,000 for its 175-room hotel, average daily room rates of $205.00, and average variable costs of $155.00 for each room rented.

The hotel operates 365 days per year (please ignore leap years).

The hotel is subject to an income tax rate of 28%.

Required

How many rooms-nights per year must the hotel book to earn net income (after taxes) of $300,000?

Provide a description of a prediction that you might make based on the results of your analysis.

Part B

GH Artist Supply, Inc. is a new company that specializes in panels and frames for artists.

In a new product line, GH managers plan to create new, eco-friendly panels in three sizes: large, medium, and small.

The current budget plan for the first year of operations provides the following information:

SmallMediumLarge

# of units 200 110 80

Selling price per unit $20 $45 $90

Variable cost per unit $14 $18 $31

Fixed costs $5,000 $2,800 $2,200

Required

Two managers within GH are arguing about the best way to calculate the break-even point in this multi-product scenario. Each has their own method they would like to use.

Compute the break-even point using the two common methods used for multi-product scenarios.

For each method, describe the assumption that is unique to that method.