QUESTION FIVE (20 Marks)

Part A (10 Marks)

The Sea Breeze Hotel is located in a resort community. Because business is slow in the winter season, the hotel is considering closing for 6 months. By closing, Sea Breeze would incur additional shutdown and start-up costs of $15,000; however, the total fixed costs will be reduced to $40,000 during the 6-month winter period. Below is a condensed income statement for both seasons:

6 Months 6 Months 12 Months

in season off season Combined

Sales $790,000 $198,000 $988,000

Less: variable costs 470,000 118,000 588,000

Contribution margin $320,000 $80,000 $400,000

Less: fixed costs 142,000 142,000 284,000

Net income $178,000 $(62,000) $116,000

Prepare an analysis to determine whether Sea Breeze should close for the winter months.

Part B (10 Marks)

The Sea Breeze Hotel is located in a resort community. Because business is slow in the winter season, the hotel is considering closing for 6 months. By closing, Sea Breeze would incur additional shutdown and start-up costs of $15,000; however, the total fixed costs will be reduced to $40,000 during the 6-month winter period. Below is a condensed income statement for both seasons:

6 Months 6 Months 12 Months

in season off season Combined

Sales $790,000 $198,000 $988,000

Less: variable costs 470,000 118,000 588,000

Contribution margin $320,000 $80,000 $400,000

Less: fixed costs 142,000 142,000 284,000

Net income $178,000 $(62,000) $116,000

Prepare an analysis to determine whether Sea Breeze should close for the winter months.