Question

Jason rents rooms in his hotel for an average of $100 per night. The variable cost per rented room is $20. His fixed costs are $100,000 and his target profit is $20,000. For Jason, to earn his target profit, he will need to rent out ________ rooms.
a. 1,500
b. 20,000
c. 100
d. 1,000

Answer 1

Answer:

Option (a) is correct.

Explanation:

Given that,

Variable cost per rented = $20

Average price charged per night for the room = $100

Fixed cost = $100,000

Target profit = $20,000

Contribution margin per room = Average price - Variable cost

                                  = $100 - $20

                                  = $80

Now, we need to determine the number of rooms rented out by dividing the sum total of fixed cost and target profit by the contribution margin per room.

Therefore, the number of rooms will be rented out is calculated as follows;

= (Fixed cost + Target profit) ÷ Contribution margin per room

= ($100,000 + $20,000) ÷ $80

= $120,000 ÷ $80

= 1,500