The Soma Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $56 a night. Operating costs are as follows. Salaries $10,000 per month
Utilities 2,600 per month
Depreciation 1,400 per month
Maintenance 700 per month
Maid service 8 per room
Other costs 34 per room
Determine the inn's break-even point in (1) number of rented rooms per month and (2) dollars.
1. Break-even point in rooms
2. Break-even point
If the inn plans on renting an average of 50 rooms per day (assuming a 30-day month), what is (1) the monthly margin of safety in dollars and (2) the margin of safety ratio? (Round ratio to 0 decimal places, e. g.10.)
1. Margin of safety
2. Margin of safety ratio

Results are below.

Explanation:

To calculate the break-even point in units and dollars, we need to use the following formulas:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point (dollars)= fixed costs/ contribution margin ratio

Fixed costs= 10,000 + 2,600 + 700= $13,300

Unitary variable cost= 8 + 34= $42

Break-even point in units= 13,300 / (56 - 42)

Break-even point in units= 950

Break-even point (dollars)= 13,300 / (14/56)

Break-even point (dollars)= $53,200

Now, we need to determine the sales level and the margin of safety in dollars and ratio:

Sales= (50*30)*56= $84,000

Margin of safety= (current sales level - break-even point)

Margin of safety= 84,000 - 53,200

Margin of safety= $30,800

Margin of safety ratio= (current sales level - break-even point)/current sales level

Margin of safety ratio= 30,800 / 84,000

Margin of safety ratio= 0.37 = 37%

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