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A hotel with $18,000 of monthly fixed costs raises its rate to $190 per room night against a $10 variable cost and sells 150 room nights. What is the operating income?
A$9,000
B$4,500
C$27,000
D$12,000
Answer & Solution
Correct answer: A. $9,000
1. Sales are 150 room nights times $190, which is $28,500.
2. Variable costs are 150 room nights times $10, which is $1,500.
3. Contribution margin is $28,500 minus $1,500, which is $27,000.
4. Fixed costs of $18,000 are deducted from that contribution margin.
5. $27,000 minus $18,000 gives operating income of $9,000.
6. $27,000 is the contribution margin, which is the figure before fixed costs are charged.
7. The higher rate cuts breakeven to 100 room nights, so the 50 room nights above it earn $180 each.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 5.3.5 Breakeven Analysis for a Service Business_
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