Sunrise Hotels (B)

January 2018.

The GM has asked you to prepare CVP analysis to aid in discussing next year's financial expectations at the upcoming Area Managers' Meeting. The meeting brings together 45 hotel managers and three district managers from the Southwest Region. From your managerial accounting class, you learned that break-even sales volume is computed using fixed costs and the unit contribution margin. Since you will be forecasting break-even for this year (2018), you need to make several adjustments to the three years of historical data you obtained. These adjustments are described as follows:

? Price. You examine the average selling price (i.e., average daily rate) for the past two years and decide that the hotel's room rate for next year will continue the same trend; in other words, you will realize the same percentage increase (or decrease) that was experienced in the past year. For example, if your rate increased 8% from 2016 to 2017, you will then forecast the 2018 room rate to be 8% above 2017's room rate.

? Costs. Your hotel's variable and fixed costs are obtained from the (A) case, in which you estimated the hotel's cost equation. After consultation with industry experts, you predict fixed costs will be the same next year. Further, you expect the variable cost per room-night to increase 4% due to inflation.

Based on your analysis of local market data, you believe that sales volumes will remain flat; that is, the number of rooms rented in 2018 will be unchanged from the 2017 sales volume.

Required

1. What are the assumptions of CVP analysis?

2. Compute the breakeven sales volume for 2018.

3. Calculate the margin of safety.

4. Determine the degree of operating leverage. What happens to leverage at different levels of planned sales volume? Hint: Compute operating leverage at sales volumes of 50% and 120% of the 2018 planned sales volume.

5. Draw a CVP plot and label the different attributes of the plot. Provide a brief interpretation of your figure.

Rooms Available Rooms Rented Rooms Revenue Other Revenue Total Revenue | Front Office House- keeping Other Personnel Total Personnel Supplies Other Expenses | Repairs Energy Other Utilities 2015 3162 1017 $ 39,920.00 $ 180.00 $ 40,100.00 ; $ 8,823.00 $ 3,539.00 $ 7,880.00 $ 20,242.00 $ 268.00 $ 4,597.00 | $ 923.00 $5,269.00 $ 720.00 2015 2958 823 $ 29,777.00 365.00 $ 30,142.00 | $ 8,263.00 2,979.00 $ 17,220.00 $ 867.00 3,119.00 | $1,888.00 $4,676.00 $ 2,581.00 2015 3162 1393 $ 52,099.00 S 244.00 $ 52,343.00 ! $ 8,864.00 S 4,781.00 21,621.00 $2,031.00 2,866.00 ! $2,085.00 $ 4,056.00 S 3,294.00 2015 3060 1421 $ 51,618.00 to to 52,068.00 | $ 8,452.00 4,461.00 7,014.00 19,927.00 $2,031.00 2,866.00 ; $2,085.00 $ 4,056.00 S 3,294.00 2015 5 3162 1594 $ 64,288.00 655.00 $ 64,943.00 | $ $ 7,806.00 $ 5,294.00 8,357.00 21,457.00 $1,486.00 to to to 2,140.00 | $ 558.00 $5,934.00 S 1,083.00 2015 6 3060 2040 $ 87,321.00 S 869.00 $ 88,190.00 | $ 8,265.00 $ 7,222.00 $ 6,411.00 $ 21,898.00 $ 652.00 $ 2,711.00 | $2,637.00 $7,473.00 $ 5,854.00 2015 7 3162 1984 $ 101,024.00 S 1,396.00 $ 102,420.00 | $ 9,103.00 $ 22,870.00 $2,327.00 -to 4,052.00 ! $4,938.00 $6,389.00 3,107.00 2015 8 3162 1764 $ 80,967.00 S 705.00 $ 81,672.00 ! $10,321.00 $ 6,076.00 $ 4,930.00 $ 21,327.00 $1,908.00 3,592.00 ; $ 731.00 $6,315.00 $ 874.00 2015 9 3060 1475 $ 56,488.00 $ 834.00 $ 57,322.00 ; $ 9,282.00 $ 5,366.00 21,451.00 $ 620.00 $ 1,919.00 | $1,421.00 $7,865.00 $ 7,396.00 11 2015 10 3162 1271 $ 46,754.00 S 643.00 $ 47,397.00 | $ 9,845.00 $ 4,361.00 20,554.00 $1,456.00 $ 2,305.00 ! $2,298.00 $4,019.00 $ 3,312.00 2015 11 3060 1012 $ 37,747.00 $ 556.00 $ 38,303.00 | $ 6,573.00 $ 3,212.00 6,632.00 16,417.00 $ 972.00 $ 2,730.00 | $ 711.00 $2,441.00 $ 3,075.00 13 2015 12 3162 1141 $ 38,376.00 S 271.00 S 38,647.00 | $ 7,325.00 3,882.00 6,871.00 18,078.00 $1,105.00 1,296.00 ; $1,701.00 $6,408.00 S 2,401.00 2016 N P 3162 922 $ 34,426.00 341.00 $ 34,767.00 ; $ 9,201.00 $ 3,774.00 19,511.00 $1,089.00 to to 2,649.00 | $1,323.00 $5,321.00 $ 3,182.00 15 2016 32,728.00 to 864.00 $ 33,592.00 $ 6,058.00 3,283.00 6,162.00 $ 15,503.00 $ 787.00 2,647.00 ! $1,328.00 $6,659.00 $ 3,949.00 16 2016 3162 1189 $ 42,630.00 336.00 $ 42,966.00 $ 8,823.00 4,303.00 8,614.00 21,740.00 $1,232.00 to to 3,097.00 | $2,077.00 $6,017.00 $ 10,191.00 17 2016 3060 1234 $ 40,373.00 574.00 40,947.00 $ 8,495.00 4,117.00 $ 4,150.00 $ 16,762.00 $1,108.00 2,158.00 ; $4,800.00 $6,311.00 3,523.00 18 2016 3162 1546 $ 58,119.00 58,939.00 | $ 8,942.00 $ 5,622.00 7,387.00 21,951.00 $2,594.00 3,034.00 | $ 2,833.00 $4,441.00 $ 5,875.00 19 2016 6 3060 1871 $ 74,540.00 to 75,467.00 | $ 9,208.00 24,439.00 $4,525.00 to to to 2,231.00 ! $9,088.00 $1,222.00 S 2,241.00 20 2016 3162 2265 $ 99,660.00 to 1,012.00 $ 100,672.00 | $11,306.00 $ 6,909.00 8,832.00 $ 27,047.00 $2,929.00 to 6,880.00 | $ 4,380.00 $9,074.00 $ 3,119.00 21 2016 8 3162 2003 $ 85,785.00 S 1,200.00 $ 86,985.00 | $ 9,159.00 $ 23,929.00 $2,038.00 $ 3,062.00 ; $ 350.00 $5,040.00 $ 2,238.00 22 2016 9 3060 1542 $ 64,104.00 S 1,025.00 $ 65,129.00 ; $ 7,353.00 $ 19,490.00 $1,342.00 1,425.00 | $7,471.00 $2,352.00 $ 2,313.00 23 10 3162 1194 $ 48,663.00 370.00 $ 49,033.00 | $ 8,714.00 $ 18,033.00 $2,116.00 1,975.00 | $1,010.00 $5,415.00 $ 2,378.00 24 2016 11 3060 915 $ 36,997.00 $ 504.00 $ 37,501.00 ! $ 8,200.00 $ 3,461.00 $ 7,697.00 $ 19,358.00 $ 436.00 $ 1,399.00 | $ 499.00 $5,523.00 $ 2,420.00 25 2016 12 3162 900 $ 37,519.00 $ 505.00 $ 38,024.00 | $ 8,811.00 $ 4,603.00 $ 16,423.00 $2,818.00 $ 3,224.00 ; $ 1,037.00 $5,662.00 $ 2,464.0025 Year Month Rooms Available Rooms Rented Rooms Revenue Other Revenue Total Revenue | Front Office House- keeping Other Personnel Total Personnel Supplies Other Expenses | Repairs Energy Other Utilities 26 2017 1 3162 719 $ 27,762.00 $ 463.00 $ 28,225.00 , $ 8,255.00 $ 3,083.00 $ 6,827.00 $ 18,165.00 $ 421.00 $ 1,836.00 | $2,145.00 $5,121.00 $ 1,914.00 27 2017 2856 788 $ 26,742.00 $ 389.00 $ 27,131.00 | $ 7,390.00 $ 2,710.00 $ 4,774.00 $ 14,874.00 $1,315.00 $ 4,563.00 | $ 1,191.00 $7,513.00 $ 2,480.00 28 2017 3162 1367 $ 43,897.00 $ 772.00 $ 44,669.00 | $ 9,719.00 $ 5,601.00 5,316.00 $ 20,636.00 $ 641.00 $ 467.00 | $1,836.00 $8,430.00 $ 2,395.00 29 2017 3060 1253 $ 39,692.00 534.00 $ 40,226.00 | $ 7,916.00 $ 4,298.00 to to 4,963.00 17,177.00 $1,496.00 1,800.00 ; $1,401.00 $1,641.00 $ 2,935.00 30 2017 3162 1644 $ 54,763.00 to 862.00 $ 55,625.00 ; $ 9,498.00 to 6,513.00 6,281.00 to to to 22,292.00 $4,095.00 to to 2,156.00 | $2,710.00 $4,649.00 $ 2,046.00 31 2017 3060 2030 $ 78,221.00 $ 962.00 $ 79,183.00 | $ 8,792.00 $ 7,898.00 5,562.00 22,252.00 $1,887.00 $ 1,822.00 ! $3,503.00 $3,307.00 $ 2,431.00 32 2017 3162 2572 $ 105,477.00 S 1,312.00 $ 106,789.00 | $12,624.00 $ 12,189.00 6,979.00 31,792.00 $4,633.00 to 3,889.00 ! $1,387.00 $6,864.00 2,876.00 33 2017 3162 2107 $ 86,730.00 S 1,038.00 $ 87,768.00 ! $ 7,830.00 S 9,187.00 7,998.00 25,015.00 $2,718.00 to 3,092.00 $3,271.00 $9,173.00 S 2,664.00 34 2017 9 3060 1722 $ 70,093.00 $ 710.00 $ 70,803.00 ; $ 6,382.00 8,634.00 7,776.00 22,792.00 $3,103.00 -to 1,698.00 / $1,639.00 $4,094.00 $ 2,931.00 35 2017 10 3162 1242 $ 48,832.00 569.00 $ 49,401.00 | $ 8,153.00 $ 5,412.00 6,945.00 20,510.00 $1,860.00 S 3,750.00 | $1,732.00 $4,118.00 $ 2,295.00 36 2017 11 3060 1095 $ 42,596.00 $ 884.00 $ 43,480.00 ! $ 9,269.00 $ 4,443.00 7,330.00 $ 21,042.00 $ 425.00 $ 2,513.00 | $ 952.00 $5,428.00 $ 2,786.00 37 2017 12 3162 1014 $ 39,089.00 $ 561.00 $ 39,650.00 ! $ 9,066.00 S 4,513.00 S 6,410.00 $ 19,989.00 $1,252.00 S 2,447.00 , $4,228.00 $1,399.00 $ 1,994.00