San Marcos Inn_Breakeven analysis

The San Marcos Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $50 a night. Operating costs are as follows. Salaries ………………………..$8,500 per month Utilities ……………………….. 2,000 per month Depreciation ………………….. 1,000 per month Maintenance ………………….. 500 per month Maid service ………………….. 5 per room Other costs …………………… 33 per room Instructions (a) Determine the inn’s break-even point in  (1) Number of rented rooms per month  (2) Dollars. (b) If the inn plans on renting an average of 50 rooms per day (assuming a 30-day month), what is  (1) The monthly margin of safety in dollars  (2) The margin of safety ratio?

a) Determine the inn’s break-even point in  (1) Number of rented rooms per month 

Room Rent $50 per night

Variable cost

Maid service $5 per room

Other costs $33 per room

Total variable costs $38 per room

Contribution $12 per room

Fixed costs

Salaries $8,500 per month

Utilities $2,000 per month

Depreciation $1,000 per month

Maintenance $ 500 per month

Total Fixed costs $11,500 per month

Breakeven point in Number of rented rooms

= Total fixed costs / Contribution per room

= $11,500 / $12

= 959 rented rooms per month (2) Dollars

Contribution margin ratio

= Contribution per room / room rent

= $12/ 50

= 24%

Breakeven point in dollars

= Total fixed costs / Contribution margin ratio = $11,500 / 24%

= $47,917

(b) If the inn plans on renting an average of 50 rooms per day (assuming a 30-day month), what is  (1) the monthly margin of safety in dollars 

Actual sales = $50 x 50 x 30

= $75,000

Breakeven sales = $47,917

Margin of safety = $75,000- 47,917

= $27,083 (2) The margin of safety ratio?

Margin of safety ratio

= margin of safety / Actual sales

= $27,083 / 75,000

= 31.11%