Question

A hotel has 2 departments: rooms and F&B. Room revenue last year was equal to $2’000’000 and that of F&B was equal to $1’000’000. Variable cost % for rooms is equal to 15% and that of F&B is equal to 40%. Total annual fixed costs for the entire hotel are $2’000'000. Required:

1) Find contribution margin ratio for rooms department, F&B department and the hotel as a whole, assuming constant revenue mix.

Answer 1

Contribution margin ratios are 85% for the rooms department, 60% for the F&B department, and 76.67% for the hotel as a whole. These are calculated by subtracting variable costs from revenues and dividing by revenues.

Step-by-step explanation:

Contribution Margin Ratio Calculation

To find the contribution margin ratio for the rooms and F&B department and the hotel as a whole, we need to follow a few steps. The contribution margin ratio is calculated by subtracting the variable costs from the revenue and then dividing that number by the revenue.

Rooms Department

Revenue for rooms: $2'000'000

Variable costs (%): 15% of $2'000'000 = $300'000

Contribution Margin Ratio for rooms: (Revenue - Variable Costs) / Revenue = ($2'000'000 - $300'000) / $2'000'000 = 1 - 0.15 = 85%

F&B Department

Revenue for F&B: $1'000'000

Variable costs (%): 40% of $1'000'000 = $400'000

Contribution Margin Ratio for F&B: (Revenue - Variable Costs) / Revenue = ($1'000'000 - $400'000) / $1'000'000 = 1 - 0.40 = 60%

Hotel Total

Total Revenue: $2'000'000 (rooms) + $1'000'000 (F&B) = $3'000'000

Total Variable Costs: $300'000 (rooms) + $400'000 (F&B) = $700'000

Contribution Margin Ratio for the hotel: (Total Revenue - Total Variable Costs) / Total Revenue = ($3'000'000 - $700'000) / $3'000'000 = 76.67%

The fixed costs of $2'000'000 remain constant and are not included in the contribution margin ratio but are crucial in determining overall profitability.