Question

The Palmer Acres Inn is trying to determine its break-even point during its off-peak season. The inn has 50 rooms that it rents at $115 a night. Operating costs are as follows.

Salaries $5,500 per month
Utilities $1,000 per month
Depreciation $1,200 per month
Maintenance $1,868 per month
Maid service $31 per room
Other costs $61 per room
Determine the inn's break-even point in number of rented rooms per month.

Answer 1

416 rooms rented per month

Step-by-step explanation:

variable costs = maid service ($31) + other costs ($61) = $92 per room

contribution margin = rent per room - variable cost per room = $115 - $92 = $23

total fixed costs = salaries ($5,500) + utilities ($1,000) + depreciation ($1,200) + maintenance ($1,868) = $9,568

break even point in units = total fixed costs / contribution margin = $9,568 / $23 = 416 rooms rented per month

The break even point represents the output level where total revenue = total costs.

Answer 2

124 rooms per month

Step-by-step explanation:

Total operating cost per month = 5500 +1000+1200+1868+(31*50)+(61*50)

= $14,168

Rental income per night = 115

Therefore, Breakeven point in number of rented rooms = 14168/115=123.2

Approximately, atleast 124 rooms should be rented in a month to break even