A resort hotel has total annual sales revenue of $1,000,000, variable costs of $350,000, and fixed costs of $570,000. The fixed costs include $80,000 a year for land rental lease.
a. Calculate the hotel’s breakeven point.
b. If the owners had an equity investment in the hotel of $1,200,000, what level of sales revenue is required for an operating income (before tax) representing a 12 percent return on their investment?
c. In a renegotiation of the land lease, the landowner has offered management an alternative to the current fixed lease currently being paid. The alternative is 10 percent of the resort’s contribution margin.
i. If management accepts this proposal, what would be the resort hotel’s new breakeven point?
ii. Calculate the indifference point.
iii. Explain whether management should accept this proposal if next year’s total sales revenue is expected to be $1,200,000?
iv. Should management accept this proposal if next year’s total sales revenue is expected to be $1,400,000?