Question

Great Eastern Inns has a total of 2,300 rooms in its chain of motels located in eastern Canada. On average, 45% 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 30%. A total of $1,074,330 in operating cost was incurred during February.

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 45% 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

Answer:

Day Rooms at the 45% capacity per month = 2,300 * 45% * 30 = 31,050

Monthly Operating cost at 45% capacity ie. 31,050 day rooms = 31,050 * $39 = $1,210,950

February's Operating cost at 30% capacity i.e 20,700 day rooms = $1,074,330

Difference = 10,350 day rooms = $136,620

1. The variable cost per occupied room per day = $136,620 / 10,350 = $13.20

2. Fixed Opersting cost per month = $1,210,950- 31,050 * $13.20 = $801,090

3. March's operating costs at 45% i.e. (31,050 * 45/45 = 31,050 day rooms) = 31,050 * $13.20 + $801,090 = $1,210,950