Question 2:

Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan. Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual salary of $41,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,000 per year. The rooms rent at an average price of $60 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10 per person per night and the cost of food which is $5 per person per night.

Instructions

(a) Determine the variable costs per person per night and the total annually fixed costs.

(b) Determine the breakeven point in (a) number of rentals and (b) in dollars using the contribution margin technique.

(c) If the current number of rentals is 4,000, by what percentage can rentals decrease before Jane has to worry about having a net loss? That is, what is its margin of safety ratio?

(d) Jane is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $3 for food costs per person per night. Jane feels she can increase the room rate to $68 per person per night. Determine the number of rentals and the sales revenue Jane needs to break even if the changes are made.