(Please show all workings to get full credit; any answer without supporting analysis and detailed discussion leading to your answer will not receive any credit)

Sunrise Resort is a hotel located next to the beautiful Lake Zymba, NY. It is open only during the summer season spanning 20 weeks from June to September. The resort has 150 rooms, each with a spectacular view of the pure, light blue water. Each room rents for $110 per night during the season. The average occupancy rate is 90% during the season. All 150 rooms of the resort are closed down for the off-season.

Samantha Carr, the owner of the lodge, is an occupied business woman. To help her out, she hired a hotel manager, Jonny Jam, who is paid $78,000 annually. Jonny is responsible for the hotels accounting and local sales promotions. During the season, an assistant to the manager is hired and paid $26,000 for the season. Variable costs are $10 for every night a room is occupied by a guest. These costs include the wages for maids and supplies expenses for cleaning rooms. In addition, the lodge incurs a cost of $52 per room for every night a room is kept open. These costs include the additional part-time staff required for supervision and other cost that increase with the number of rooms kept open. Annual depreciation expense for the lodge building, equipment and furniture is $520,000. The income statement for the most recent year is in Exhibit 1.

Samantha Carr is concerned that she incurs expenses around the year without earning any revenues during the off-season. She would like to evaluate the possibility of keeping the lodge open during the off-season like some of the other hotel property she owns in the city of Fulton, NY. Specifically, she wants to consider keeping 50 rooms in the west tower of the lodge open during the off-season at a reduced rate of $80 per room-night. She estimated that the average occupancy rate during the off-season would be about 80% as it would be attractive to people exercising cross-country skiing. An assistant to the manager will be hired and paid $1,000 per week for every week the west tower of the lodge is kept open in the off-season. Other costs will also continue to be $52 for every night a room is kept open and an extra $10 for every night a room is occupied during the off-season.

Exhibit 1. Income Statement for the Most Recent Year

Sales revenue (18,900 room-nights x $110) $ 2,079,000

Expenses:

Managers salary $ 78,000

Assistants wages 26,000

Per room-night kept open (21,000 x $52) 1,092,000

Per room-night occupied (18,900 x $10) 189,000 $1,385,000

Depreciation (straight-line method) 520,000 $ 1,905,000

Income before tax $ 174,000

Income tax (@40%) 69,600

Net income $ 104,400

Total number of room-nights kept open = 150 rooms x 7 days x 20 weeks = 21,000 room-nights

Total number of room-nights occupied = 150 rooms x 7 days x 20 weeks x 90% = 18,900 room-nights

Required: SHOW ALL WORK IN DETAIL INCLUDING CALCULATIONS

1. Determine the in-season contribution margin and calculate the break-even point in terms of average room occupancy rate each week during the 20 weeks of in-season assuming that all 150 rooms are kept open and during the 32 weeks of off-season under Samantha Carrs proposal. (Show detailed workings and discuss in detail how, why and on what basis do you spread the annual fixed costs while determining the breakeven point.)

2. Compute the average room occupancy rate necessary to generate $3,000 profit before tax per week during the off-season under Samantha Carrs proposal. (Show calculations).

3. Should the proposal to keep the lodge open in the off-season be adopted? (Discuss in detail with appropriate workings to support your answer.)