## Skyview Manor Case Solution

**ANSWER TO QUESTION # 1 **

In exhibit 1, a detailed calculation has been done in order to calculate the rooms that must be rented each night in season for the hotel to achieve break even. The total costs have been bifurcated into fixed and variable costs. The variable costs include cleaning supplies, linen services and half of the miscellaneous expenses. These costs are classified as variable costs because they are dependent on the number of rooms and occupancy.

The variable costs are then deducted from the total cost in order to arrive at fixed costs. The exhibit shows that the total variable costs and the total fixed cost of the company is $19,497 and $118,913 respectively.

Furthermore, the average revenue is calculated by dividing total revenue by the relevant number of rooms/ day; likewise, average variable cost per room per night is also calculated. The contribution margin is calculated by subtracting the average variable cost from average revenue.

The total fixed cost of the company is then divided by the average contribution margin to arrive to break even rooms per night. The calculation shows that the company should rent 54 rooms per night in order to attain break even. Occupancy rate has been also calculated which shows that in order to attain break even the company should have a 67.3% occupancy rate.

**ANSWER TO QUESTION # 2**

**I**n exhibit 2, calculation has been done that as to what would be the revised profit of the company if, all room rates were raised by $5 on weekend nights, but occupancy fell to 72 rooms instead of 80.

The total days of weekends are calculated by multiplying week nights in a month with number of months of operations. The total number of weeknights calculated is 32. The occupancy fell from 80 to 72 rooms per night which means that there is a loss of contribution margin of 8 rooms per night. The total loss of contribution margin of 8 rooms is calculated by multiplying decrease in no. of rooms with weekend nights and contribution margin per room per night. The calculation shows that the total loss in contribution margin is $4710.

On the other hand, $5 is added to the contribution margin of 72 rooms per night. The total amount of addition in the contribution margin is calculated by multiplying number of rooms with the additional amount of contribution margin and number of week nights in the operation period. The calculation shows that the total amount of addition in the contribution margin is $11,520.

The net change in contribution margin is calculated by subtracting the total loss in contribution margin from the total addition in the contribution margin. The net addition in the contribution margin obtained is $6809.

This net change/addition is then added to the normal profit of the company, which is $22,390, in order to get the revised profit before tax. The revised profit before tax as per the calculations of exhibit 2 is $29,199.

**ANSWER TO QUESTION # 3 **

In exhibit 3, a calculation is done to obtain the proposed incremental contribution margin per occupied room per day during the off season. The incremental variable expenses associated with the off season are accounted in calculating the contribution margin for off season. The variable expenses are calculated on the basis of equivalent rooms/ nights. The equivalent rooms / nights calculated are 7,680 occupied nights (120 * 80 * 0.8).

Moreover, the variable expenses calculated are cleaning supplies, linen costs for each, single occupancy as well as double occupancy and miscellaneous expenses. The prices of the room during the off season are $10 and $15 for single occupancy and double occupancy respectively. The variable expenses calculated are then subtracted from the price of the room in order to get the contribution margin for both the rooms respectively for the off season.

The calculation shows that the contribution margin for single occupancy and double occupancy during the off season are $8.26 and $12.25 respectively. Moreover, the average contribution margin is also calculated based on the usage. The weighted average contribution margin, for the off season as per the calculation is $11.45.

**ANSWER TO QUESTION # 4**

The annual expenses that are incremental to that decision alternative but are not related to room days occupied, for keeping inn open during the off season are

- No pool and no advertisement
- No pool but advertisement
- Pool but no advertisement
- Pool and advertisement
- Pool and bubble but no advertisement

Pool and bubble along with advertisement..................

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