Traditional income statement, Cost Accounting

Traditional income statement:

The DU Inn is an 80-room hotel located on some mountaintop in Colorado. It has no bar or restaurant and is positioned as a mid-priced, good quality "homey" hotel. It is open only during the ski season. It opens on Dec 1 and closes the last day of March (assume 30 days a month all year). The ski mountain it serves operates on a permit from the state which allows only 120 days of operation per year. The primary source of revenue comes from the rental of rooms. There are no food and beverage facilities on-site. Guests can dine at various restaurants that are located nearby. Each of the 50 rooms in the east wing rents for $75 per night for single occupancy or $100 for double occupancy. The west wing of the hotel has 30 rooms, all of which have spectacular views of the skiing slopes, the mountains and the village. Rooms in this wing rent for $100 and $150 for single or double occupancy respectively. The average occupancy rate during the season is 80% for the east and west wing. The ratio of single versus double occupancy is 2:8, on average for both the east wing and west wing.

Mr. Kaching is the general manager of the hotel earning a salary of $15,000 for the entire ski season ($3,750 a month). The general manager's salary is paid over 12 months. He acts as a caretaker of the facilities during the off-season and also contracts most of the repair and maintenance work during that time. Mr. Kaching is concerned about the off-season months, which show losses each month and reduce the high profits reported during the ski season. He has provided a proposal to the owners who had recently acquired the hotel. The proposal is to reduce the off-season losses by keeping the west wing of the hotel operating year-round. He estimates the average occupancy rate for the off-season to be about 30% for the next few years. Kaching estimates that with careful attention to the off-season clientele, a 40% occupancy rate for the 30 rooms during the off-season would be much more likely if the owners would commit $40,000 for advertising each year ($5,000 for each of 8 months). There is no evidence to indicate that the 2:8 ratios of singles vs. doubles would be any different during the remainder of the year in the future. Rates however, would have to be drastically reduced. Present plans are to reduce them to $75 and $100 for singles and doubles for the off-season.

Mrs. Kaching is paid a salary of $2,400 a month for supervising the room attendants and helping with the check-in. The regular desk clerk and each room attendant (4 room attendants on staff) are paid on a daily basis at the rate of $15 and $10 per hour respectively for 8 hours a day and these amounts are not expected to change. The taxes and other fringe benefits on the total salaries and wages are estimated at 20%. The current annual depreciation expenses on the hotel are $50,000 per year. Property taxes and insurance are expected to be fixed at $40,000 and $30,000 respectively per year. Repairs and maintenance expenses are also fixed and estimated at $27,000.

Although depreciation and property taxes would not be affected by the decision to keep the west wing open during the off-season, insurance would increase by $10,000 for the year. Using the west wing during the off-season would also not interfere with the work of the general manager, but would cause an estimated additional $6,000 per year for repair and maintenance. During the off-season, it is estimated that Mr. and Mrs. Kaching could handle the front desk without any increase in personnel. Mrs. Kaching would however, be paid and additional $1,000 a month in salary.

The cleaning supplies are considered a direct function of the number of rooms occupied. Cleaning supplies are estimated at $6.00 per room occupied. Miscellaneous expenses are a mixed cost with the variable portion estimated at $4.75 per room occupied and a fixed portion estimated at $35,000 which will not change with 12 months operations. Linen is rented from a supply house and the cost also depends on the number of rooms occupied. Linen expenses are $8 per room occupied, but are twice on average for double occupancy rooms. The utilities expenses include telephone expenses and other utilities such as electricity, gas, water, sewer and heating. The telephone bills for each of the four seasonal months were as follows: 80 telephones @ $30/month for each phone and a basic monthly service charge of $5000. All other utilities (electric, water, gas, sewer, heating) are a function of the number of rooms available for sale to the public at a rate of $2.50 per room. The hotel pays a federal income tax rate of 35%. In addition, the hotel is currently collateralized by a bank loan that had an original principal sum of $5 million. This loan is for a term of 10 years with interest only annual payments of 5%.

If the hotel is open during the off-season, the basic monthly telephone service charge is reduced by half and the monthly telephone charge will apply only to active telephones in the west wing. In addition, the other utilities expenses (water, electric, gas, sewer, heating) would be reduced to $1.50 per available room.

Questions:

11. Using the above information, create a traditional income statement for the ski season to show the amount the hotel would generate in net income after taxes.

12. List the variable costs and fixed costs and their respective amounts for the ski season. Sum the total variable costs and fixed costs

13. Convert your traditional income statement from question 1 into a contribution income statement.

14. What is the overall contribution margin per room and contribution margin ratio per room during the ski season?

15. Compute the breakeven point in the number of rooms sold and room revenues during the ski season. What is the breakeven occupancy rate?

16. If the hotel wanted to generate $100,000 in operating income before taxes, what is the number of rooms it must sell and the revenues it must generate during the ski season? What is the occupancy rate?

17. If the hotel wanted to generate $104,000 in net income after taxes, what is the number of rooms it must sell and the revenues it must generate during the ski season? What is the occupancy rate? Create a contribution income statement to prove your answer? Hint: The formula to adjust for income taxes is : [FC + (NI/(1-Tax rate)]/CM

18. What is the incremental total variable cost and total fixed cost that will be incurred during the off-season? What is the incremental contribution margin per room and contribution margin ratio per room?

19. Create an incremental contribution income statement for the off-season and compute the net income after taxes?

20. Based on your incremental analysis, what is the breakeven point in number of rooms sold and revenues generated during the off-season? What is the occupancy necessary to breakeven during the off-season?

Posted Date: 2/11/2013 2:22:33 AM | Location : United States







Related Discussions:- Traditional income statement, Assignment Help, Ask Question on Traditional income statement, Get Answer, Expert's Help, Traditional income statement Discussions

Write discussion on Traditional income statement
Your posts are moderated
Related Questions
i have a factory and 87 employees . we have a closure plan in 12 months. what would be the charges?

Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2011. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $

For your assignment, discuss when the government and nonprofit organizations would use each of the following funds: Capital projects fund Debt service fund Special r

Alameda Service center just purchased an automobile hoist for $ 14000. The hoist has a 6 year lifeand an estimated salvage value of $1481. Installation costs were $3020, and freigh

formula for economic order quantity

Stages of Implementation of Zero Based Budgeting 1. Definition of decision package. It is the comprehensive description of the organizations activities or functions.

Calculate Cost or Equivalent Units The given work in progress account concerns to the blending department of a company, a soft-drinks company for the month of January in 1999

Behavioral Classification of Costs Definition Cost behavior refers to the change in costs as increase or may decrease like the output level changes that are like we risin

How does idel capacity effect cost behavior patterns and factory overhead application methods

Your client has asked you to evaluate an investment project for her using what you have learned in school regarding the net present value method. The project will run for eight yea