Question

Norman Bates is considering opening a motel. He estimates that the following costs will be incurred during his first month of operations: Rent $9,200, Wages $16,400, Laundry service 7,000, Occupancy taxes $10.00 per night. Soap & Shampoo will cost $3.00 per night. He must also pay a management company a management fee of $1.10 per night, since he will not be able to manage all aspects of the motel. In addition, cleaning costs are expected to behave in relation to the number of nights as follows: Number of nights Cleaning Costs 40 $ 600 60 $ 730 90 $ 960 120 $1260 140 $1500 Norman anticipates that he can charge $90 per night for each room. Instructions (a) Using the high-low method, determine the variable and fixed cost components of the cleaning costs. (b) Calculate the total variable costs and total fixed costs (c) Determine the break-even point in number of nights and sales dollars.

Answer 1

Fixed costs:

Rent $9,200

Wages $16,400

Laundry service $7,000

Variable costs:

Soap & Shampoo $3.00

Management fee $1.10

Mixed costs (cleaning):

40 $600

60 $730

90 $960

120 $1,260

140 $1,500

a) variable cost = ($1,500 - $600) / (140 - 40) = $900 / 100 = $9

fixed costs = $600 - ($9 x 40) = $240

b) total fixed costs = $32,840

total variable costs per night = $13.10

c) contribution margin = $90 - $13.10 = $76.90

break even point = $32,840 / $76.90 = 427 nights

sales dollars = $427 x $90 = $38,430