Question

Great Eastern Inns has a total of 1,600 rooms in its chain of motels located in eastern Canada. On average, 60% of the rooms are occupied each day. The company’s operating costs are $16 per occupied room per day at this occupancy level, assuming a 30-day month. This $16 figure contains both variable and fixed cost elements. During February, the occupancy rate dropped to only 40%. A total of $379,200 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 55% 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

Total days room at 60% = 1600 rooms x 60% x 30 days = 28,800 days room

Operating cost per room per day = $16

Total ooerating cost at 60% capacity = $16 x 28800 = $460,800

Operating cost at 40% capacity (given) = $379,200

Days room at 40% capacity = 1600 x 40% x 30 = 19200 days room

Difference in cost = $460800 - 379200 = $81,600

Difference in days room = 28800 - 19200 = 9600

1. Variable cost per room = 81600 / 9600 = $8.5

2. Total fixed operating cost = $216,000

Working: 460,800 - (28,800 x $8.50) = 216000

3. Total operating cost in March at 55% occupany = $440,400

Working = 1600 x 55% x 30 = 26400 days room

Total operating cost = fixed cost + variable cost

= $216,000 + ( 26400 x $8.50) = $440,400