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Tju [1.3M]
3 years ago
14

Exercise 19-13 Variable cost analysis for a special order LO A1 Grand Garden is a luxury hotel with 160 suites. Its regular suit

e rate is $210 per night per suite. The hotel’s cost per night is $135 per suite and consists of the following. Variable direct labor and materials cost $ 36 Fixed cost [($5,770,000/160 suites) ÷ 365 days] 99 Total cost per night per suite $ 135 The hotel manager received an offer to hold the local Bikers’ Club annual meeting at the hotel in March, which is the hotel’s low season with an occupancy rate of under 55%. The Bikers’ Club would reserve 45 suites for three nights if the hotel could offer a 55% discount, or a rate of $94 per night. The hotel manager is inclined to reject the offer because the cost per suite per night is $135. Required: Prepare an analysis of this offer for the hotel manager.
Business
1 answer:
zysi [14]3 years ago
8 0

Answer:

If the special offer earns a positive contribution margin, we should accept the special order.

Explanation:

Given that,

No. of suites in luxury hotel = 160

Regular suite rate = $210 per night per suite

Hotel’s cost per night = $135 per suite

Variable direct labor and materials cost = $36

Fixed cost = 99

Total cost per night per suite = $135

Contribution margin per night per suite:

= Room rate per night - Variable cost per night

= $94 - $36

= $58

Contribution margin from special offer:

= Contribution margin per night per suite × Number of nights × Number of suits

= $58 × 3 × 45

= $7,830

Management should accept the special offer.

When the company receives offer, the hotel is running at low season. occupancy rate is 55%

If the special offer earns a positive contribution margin, we should accept the special order.

Room rate is $94 for special order.

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Variable cost refers to the costs of production that fluctuate depending on the number of units​ produced.

<h3><u>Explanation:</u></h3>

The cost of any product that changes based on the quantity of goods that are produced. The volume that is produced decides the fluctuations in the variable cost. Fixed cost is the cost that will not change based on the number of units of the goods that is produced. Rent of a building can be considered as a fixed cost.

Example for variable cost may be raw materials cost, packaging cost,etc. Variable cost can be calculated by adding up the cost of labor and raw materials that are used in the production of one unit of a good. The total variable cost can be calculated by multiplying   variable cost per unit with the number of units produced.

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The city of Brock’s Water Enterprise Fund leases water treatment equipment. The life of the noncancellable lease is 10 years, an
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<u>Solution and Explanation:</u>

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Jan 5, 2018  Intangible Assets - Lease  905861  

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Jan 5, 2019  Lease Payable (\$ 125000-\$ 62469) 62531  

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2 years ago
Basic bond valuation Complex Systems has an outstanding issue of ​$1 comma 000​-par-value bonds with a 16​% coupon interest rate
salantis [7]

Answer:

a. Complex Systems' bond price​ today = $1,476.36

Explanation:

a. If bonds of similar risk are currently earning a rate of return of 9​%, how much should the Complex Systems bond sell for​ today?

This can be calculated by adding the Present Value of Coupons and the Present Value of Par Value as follows:

<u>Calculation of Present Value of Coupons</u>

The present of coupons is calculated using the formula for calculating the present value of an ordinary annuity as follows:

Present value of coupons = C × [{1 - [1 ÷ (1 + r)]^n} ÷ r] …………………………………. (1)

Where;

C = Annual coupon amount = Par value * Coupon rate = $1,000 * 16% = $160

r = required rate of return or return of similar risk = 9%, or 0.09

n = number of years = 11

Substitute the values into equation (1) to have:

Present value of coupons = $160 × [{1 - [1 ÷ (1 + 0.09)]^11} ÷ 0.09] = $1,088.83

<u>Calculation of Present Par of Value</u>

To calculate this, we use the present value formula as follows:

Present Value of Par Value = Par value / (1 + r)^n

Since Par Value is $1000 and r and n are as already given above, we have:

Present value of Par Value = $1,000 / (1 + 0.09)^11 = $387.53

Therefore, we have:

Complex Systems' bond price​ today = Present value of coupons + Present value of Par Value = $1,088.83 + $387.53 = $1,476.36

b. Describe the two possible reasons why the rate on​ similar-risk bonds is below the coupon interest rate on the Complex Systems bond.

The following are the possible two reasons:

1. Interest may vary bust the coupon is fixed. What can cause the interest rate to vary is the bond rating by rating agency. But his will not affect the coupon rate which is fixed. When the rating is high, the interest will be low. But when the rating is low, the interest will be high. This indicates a negative relationship between the rating and the interest rate.

2. The level of demand may also influence the interest rate to change. When the demand is high, the interest will be low. But when the demand is low, the interest will be high. This also indicates a negative relationship between the demand and the interest rate.

c. If the required return were at 16​% instead of 9​%, what would the current value of Complex​ Systems' bond​ be? Contrast this finding with your findings in part a and discuss.

To do this, we simply change he required return to 16% (or 0.16) in part a and proceed as follows:

Present value of coupons at 16% = $160 × [{1 - [1 ÷ (1 + 0.16)]^11} ÷ 0.016] = $804.58

Present value of Par Value at 16% = $1,000 / (1 + 0.16)^11 = $195.42

Complex Systems' bond price​ today at 16% = $804.58 + $195.42 = $1,000.00

Comparing part c result with part a result shows that if the coupon rate is greater than the required rate of return, the bond is sold at a premium. That is, price of bond will be more than par. As it can be seen in part a, the price of bond is $1,476.36 when the coupon rate of 16% is greater than the required return of 9%.

Also, the bond will be sold at par when the coupon rate and require return are equal. This is shown in part c where the bond is sold at $1,000 when both coupon rate and required return rate are equal to 16%.

By implication, we can also infer without doing any calculation that the bond will be sold at a discount if the coupon rate is less than the required rate of return.

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3 years ago
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