Marketing team has suggested Crystal Hotel to run a promotion. They are charging $80 per person for one nights accommodation including breakfast. The variable cost per person is $35 that includes food, cleaning and utilities. Fixed costs are $40,000 per year that include council rates rate, water rates and land taxes.

REQUIRED

They have asked for your expertise to carry out a CVP analysis for this promotion. Calculate the following:

1. The contribution margin per service (a unit of service is one nights accommodation for one guest).

2. The contribution margin ratio.

3. The annual break-even point in number of services and in dollars of service revenue.

4. The number of services required to earn a target net profit of $100,000 for the year (ignore income taxes).

5. Analysis the importance of CVP analysis and comment on effectiveness of this promotion based on your calculations.