Question

A Best Eastern Motel is a regional motel chain. Its rooms rent for $90 per night, on average. The variable cost is $40 a room per night. Fixed costs are $1,200,000 per year. What is the breakeven point?

Answer 1

Answer:

$2,160,000

Explanation:

For calculating break even point the following formulae is used:

Fixed Cost / {(Sales price per night - Variable cost per night) / Sales price per night}

Here Sales price is average room rent of $90

Variable cost is $40

While Fixed Cost is 1,200,000.

Calculation would be as follows:

1,200,000 / {(90 - 40) / 90} = $2,160,000

This means that Best Eastern Motel needs to make Sales (in this case Rent Rooms) worth $2,160,000 for the whole year to reach break even point.

Answer 2

Answer:

The break even point in units is 24000 rooms per year.

Explanation:

The break even point in units is a point where enough units are sold to earn a revenue that covers the total cost of the business and there is neither a profit nor a loss to the business. The break even point in units can be calculated as follows,

Break even in units = Fixed cost / Contribution margin per unit

Where,

Contribution margin per unit = Selling price per unit - Variable cost per unit

So,

Contribution margin per unit = 90 - 40 = $50

Break even in units = 1200000 / 50    =  24000 units