The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $52 a night. Operating costs are as follows. Salaries $8,800 per month
Utilities 2,600 per month
Depreciation 1,500 per month
Maintenance 750 per month
Maid service 7 per room
Other costs 32 per room
Required:
A. Determine the inn's break-even point in
(1) number of rented rooms per month and
(2) dollars.
B. Determine the inn's break-even point if the inn plans on renting an average of 50 rooms per day (assuming a 30-day month).
C. What is (1) the monthly margin of safety in dollars and (2) the margin of safety ratio?
(Round ratio to 1 decimal place)

Results are below.

Explanation:

Giving the following information:

The inn has 75 rooms that are rented at $52 a night. Operating costs are as follows.

Salaries $8,800 per month

Utilities 2,600 per month

Depreciation 1,500 per month

Maintenance 750 per month

Maid service 7 per room

Other costs 32 per room

To calculate the break-even point in units and dollars, we need to use the following formulas:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point (dollars)= fixed costs/ contribution margin ratio

We will include the depreciation expense in the fixed costs.

Fixed costs= 8,800 + 2,600 + 1,500 + 750= $13,650

Unitary variable cost= 7 + 32= $39

Break-even point in units= 13,650 / (52 - 39)

Break-even point in units= 1,050

Break-even point (dollars)= 13,650 / (13/52)

Break-even point (dollars)= $54,600

Now, we need to determine the sales level and the margin of safety in dollars and ratio:

Sales= (50*30)*52= $78,000

Margin of safety= (current sales level - break-even point)

Margin of safety= 78,000 - 54,600

Margin of safety= $23,400

Margin of safety ratio= (current sales level - break-even point)/current sales level

Margin of safety ratio= 23,400 / 78,000

Margin of safety ratio= 0.3 = 30%

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