Question

The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $52 a night. Operating costs are as follows

Salaries $9550 per month
Utilities 2600 per month
Depreciation 1500 per month
Maintenance 750 per month
Maid service 6 per room
Other costs 28 per room
Determine the inn's break-even point in (1) number of rented rooms per month and (2) dollars.
1. Break-even point in rooms
2. Break-even point
If the inn plans on renting an average of 50 rooms per day (assuming a 30-day month), what is
(1) the monthly margin of safety in dollars and
(2) the margin of safety ratio? (Round ratio to 0 decimal places, e.g. 10.) 1. Margin of safety 2. Margin of safety ratio

Answer 1

1) break even point in units = 720 rooms per month

2) break even point in dollars = $37,440 per month

____________ . ____________

1) safety margin is $40,560

2) margin of safety ratio = 52%

Step-by-step explanation:

First we have to determine the fixed and variable costs:

fixed costs = salaries + utilities + depreciation + maintenance = $9,550 + $2,600 + $1,500 + $750 = $14,400

variable costs = maid service + other costs = $6 + $26 = $32 per room

now we have to determine the contribution margin per room rented = rent price - variable costs = $52 - $32 = $20

so the break even level in units = $14,400 / $20 = 720 rooms per month

the 720 rooms per month x $52 per room = $37,440

____________ . ____________

if Soma estimates to rent 50 rooms per day, that equals 1,500 rooms per month

Soma expects to earn 1,500 rooms x $52 per room = $78,000 per month, which means that their safety margin is $40,560 (= $78,000 - $37,440)

their margin of safety ratio = $40,560 / $78,000 = 0.52 x 100 = 52%