The relax inns rooms department has annual sales of 600000...

The Relax Inn's rooms department has annual sales of $600,000 and variable costs of $180,000. The inn's food department has annual sales revenue of $200,000 and variable costs of $160,000. The inn's fixed costs are $220,000. The total sales revenue of the inn is $800,000 jointly. A. Calculate the inn's break-even point, assuming the ratio of room's sales to food sales remains constant at any level of total sales. B. The owners want to increase their restaurant's sales revenue, and they plan to spend $1,000 on brochures to be displayed in the inn's entry lobby and in the guest rooms. What level of incremental food sales must be achieved to cover the brochure cost? (Assume that room sales remain constant.) C. If the inn's owners want to increase operating income by $40,000 by increasing room's occupancy rate, what is the incremental room's sales revenue required supporting the $40,000 increase to operating income? (Assume no effect on restaurant sales.)

Transcript

00:01 So here we're doing like a revenue analysis on a company, right? so we have rooms and we know that rooms have 600 ,000 in sales and two, sorry, 180k in variable cost.

00:19 We also have food.

00:23 Food has annual sales of 200k and variable costs of 160k, right? so you can see the cost structure of the industry, right? and of course, 800 ,000 jointly.

00:40 We also know there are fixed costs.

00:44 We know that there are fixed costs of 220k.

00:48 Great.

00:48 So there's all the information we need, right? so now we want to think about the break -even point, right? so a, break -even, sorry, didn't write that break -even is where profit is equal to zero, right? so we need to set up a profit function.

01:08 And profit is going to be equal to rooms, room sales minus variable costs, plus food sales, minus their variable costs, minus the fixed costs.

01:26 Right? that's what profit is going to look like.

01:31 So right now, today, what is this equal to? right today this is equal to 420 profit on rooms plus 40k on food minus 220 k on fixed costs which is equal to 260 k right so it's not break even so we need to find um the percent loss in sales and i'm going to call that um a um or yeah we'll call it a to call it a to set profit equal to zero, right? so here we're going to have, let's suppose that we lost 8 % of the room sales, right? so then we would have 1 minus a, right? we would have profit is equal to 1 minus a minus the room stuff, right? because we can only keep 1 minus a of the remaining, plus 1 minus a of the food stuff, right? and then we would have minus 220.

02:33 And i want to set that cost equal to zero, right? so this is going to be one minus a outside of 420 plus we can just 420 plus 40 is equal to 220 and this means we can get one minus a is equal to 260 is 123.

03:06 So a is equal to 12 over 23.

03:12 That is, so the implication is we could lose 12 over 23 of all sales and break even, assuming, of course, that the variable costs are economized on at the same rate we lose sales, right? that would be the break -even point.

03:34 B, and that's a little bit over the 50%, right? a little bit over.

03:40 So we're going to spend a thousand, right? we want to spend a thousand...

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