Question

Great Eastern Inns has a total of 800 rooms in its chain of motels located in eastern Canada. On average, 55% of the rooms are occupied each day. The company’s operating costs are $39 per occupied room per day at this occupancy level, assuming a 30-day month. This $39 figure contains both variable and fixed cost elements. During February, the occupancy rate dropped to only 45%. A total of $484,800 in operating cost was incurred during February.

Required:

1.	Estimate the variable cost per occupied room per day. (Assume 30 days in a month. Do not round intermediate calculations and round your final answer to 2 decimal places.)

      

2.	Estimate the total fixed operating costs per month.

      

3.	Assume that the occupancy rate increases to 60% during March. What total operating costs would you expect the company to incur during March? (Assume 30 days in a month. Do not round intermediate calculations.)

Answer 1

Day Rooms at the 55% capacity per month = 800 * 55% * 30 = 13200

Monthly Operating cost at 55% capacity ie. 13200 day rooms = 13200 * $39 = $514800

February's Operating cost at 45% capacity i.e 10800 day rooms = $ 484,800

Difference = 2400 day rooms = $ 30,000

1. The variable cost per occupied room per day = $30000 / 2400 = $12.50

2. Fixed Opersting cost per month = 514800 - 13200 * $12.50 = $ 349,800

3. March's operating costs at 60% i.e. (13200 * 60/55 = 14400 day rooms) = 14400 * $12.50 + 349,800 = $ 529,800