Bob Newhart operates a bed and breakfast hotel in Vermont. Depreciation on the hotel is $12,000 per year. Bob employs a maintenance person, George Utley, at an annual salary of $48,000 and a cleaning person, Stephanie Vanderkellen, at an annual salary of $36,000. Real estate taxes are $15,360 per year. The rooms rent at an average price of $75 per person per night including breakfast. Other costs are laundry service and supplies at a cost of $9 per person per night and the cost of breakfast meals which is $18 per person per night.

Required:

(a) Determine the number of rentals and the sales revenue Bob needs to break- even using the contribution margin technique.

(b) If the current level of rentals is 2,900, calculate the "margin of safety".

(c) Bob is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $2 for food costs per person per night. In addition, annual fixed costs will increase by $2,240. Bob's wife Joanna feels she can increase the room rate to $79 per person per night. Determine the number of rentals and the sales revenue Bob needs to breakeven if the changes are made.

Answer rating: 100% (QA)

To calculate the breakeven point and margin of safety we need to determine the contribution margin per rental The contribution margin is the amount of ... View the full answer