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Kelly Hayes operates a bed and breakfast hotel in a beach resort area of Noosa. Depreciation on the hotel is $60,000 per year. Kelly employs
Kelly Hayes operates a bed and breakfast hotel in a beach resort area of Noosa. Depreciation on the hotel is $60,000 per year. Kelly employs a maintenance person at an annual salary of $30,000 per year and a cleaning person at an annual salary of $24,000 per year. Rates and taxes are $10,000 per year. The rooms rent at an average price of $50 per person per night including breakfast. Other costs are laundry service at $4.00 per person per night and the cost of food which is $6.00 per person per night.
Instructions:
- (a)Determine the number of rentals and the sales revenue Kelly needs to break even using the contribution margin technique.
- (b)If the current level of rentals is 4,000, by what percentage (Margin of Safety) can rentals decrease before Kelly has to worry about having a net loss? (2 marks)
- (c)Kelly is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $5.00 for food costs per person per night. Kelly feels she can increase the room rate to $65 per person per night. Determine the number of rentals and the sales revenue Kelly needs to break even if the changes are made.
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