Harbour View Lodge Ltd provides single persons’ accommodation near the site of a major public works project. The lodge charges $50 per night and each guest receives a cooked breakfast that costs $8 to prepare, a full laundry service that costs $7 per day, and free use of bathroom supplies that cost $5 per day. Total fixed costs of operating the lodge amount to $88,000 per year. Running the lodge is hard work, so the elderly proprietor expects his company to earn $1,000 profit per week after tax to make it worth his while. The company tax rate is 28% for the current financial year. REQUIRED

a. Calculate the number of night’s accommodation that would have to be sold in a year to achieve the company’s desired tax-paid profit. 3 marks

b. Calculate the number of nights’ accommodation the lodge would have to sell per year to maintain its current occupancy rate and tax-paid profit if breakfast was not provided and the company had to reduce its nightly tariff by 10%. 2 marks

c. The proprietor is considering turning some of the rooms into twin accommodation units. To do this he would have to obtain a building consent that would cost $1,500. Other fixed costs would increase by about $1,800 per year. He thinks that he could sell the twin rooms for $80 per night, but of the twenty rooms that the lodge rents out, only six would be suitable for conversion to twin rooms.

Using the information supplied to determine the answer to (a) above, calculate the number of nights single and twin room accommodation that the lodge would have to sell to meet its desired tax-paid profit. 6 marks

d. Do you think that the proprietor could rely on your calculations and advice based on (c) above to make a wise decision about converting his rooms to twin accommodation? Give reasons for your answer. 4 marks