Question

Jason rents rooms in his hotel for an average of $100 per night. The variable cost per rented room is $20. His fixed costs are $100,000 and his target profit is $20,000. For Jason, to earn his target profit, he will need to rent out ________ rooms.

a. 1,500
b. 20,000
c. It cannot be determined from the information provided.
d. 100
e. 1,000

Answer 1

a. 1,500

Step-by-step explanation:

The formula to compute the break even point for earning target profit is shown below:

= (Fixed cost + target profit) ÷ (Contribution margin per unit)

where,

Contribution margin per unit = Selling price per unit - Variable expense per unit

So, the break even point would be

= ($100,000 + $20,000) ÷ ($100 - $20)

= $120,000 ÷ $80

= 1,500 rooms