Define the terms fixed costs and variable costs

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Reference no: EM13487688

The Hotel 224 group prepares financial statements on a quarterly basis (every 3 months). The senior management is reviewing the performance of one of its hotels and making plans for the next year. The managers have in front of them the results for the year 2011 (based on some actual results and some forecasts at the end of the year):

Sales revenue Profit or (loss)

Quarter 1 (Jan - March) R400 000 (R280 000)
Quarter 2 (April - June) R1 200 000 R360 000
Quarter 3 (July - September) R1 600 000 R680 000
Quarter 4 (October - December) R800 000 R40 000

Total R4 000 000 R800 000

The total estimated number of guests who spent nights (guest nights) at the hotel for 2011 was 50 000 guests' nights. The results follow a regular pattern and there are no unexpected cost fluctuations beyond the seasonal trading shown above. For the next year, management expects an increase in the unit variable cost by 10% and a profit target level of R1 000 000. These will be incorporated into the hotel's plans.


(a) Define the terms fixed costs and variable costs. Explain how an understanding of the difference between fixed costs and variable costs can be useful to managers

(b) Calculate the total variable and total fixed costs of the hotel for 2011. In your calculation (preferably using a table) show the provisional annual results for this year in total; showing the variable and fixed costs separately. Show also the revenue and cost per guest night.

(C) If there is no increase in the guest nights for next year (2012), what will be the revenue rate per guest night be to meet the profit target for the year?

(d) If the required revenue rate per guest night is not raised above this years level, how many guest nights will be required to meet the profit target for 2012?

Reference no: EM13487688

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