Sunrise Hotels (B)

January 2018. The GM has asked you to prepare a CVP analysis to aid in discussing next years 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 hotels 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 2017s room rate.
• Costs. Your hotels variable and fixed costs are obtained from the (A) case, in which you estimated the hotels 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. (Use Total cost = $19,995 + $9.95/rental)

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.