Hospitality Industry Managerial Accounting HRT 374

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Hospitality Industry Managerial AccountingHRT 374

• Chapter 7
• Cost Volume Profit Analysis

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CVP can answer these type questions

• What is breakeven point
• What is the profit at any occupancy point
• How will an increase in property taxes affect the
  breakeven point
• How many rooms must be sold to achieve a certain
  profit

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Assumptions, Limitations Relationships

• Fixed costs remain fixed
• Variable costs fluctuate in a linear fashion
• Revenues are directly proportional to volume
• Mixed costs can be divided
• All costs can be assigned to departments
• Only consider quantitative factors

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Break Even Graphic
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Single product

• Break even point Fixed costs / Contribution
  Margin
• Contribution margin (100 VC)
• Where Contribution Margin Sales Price
  Variable costs
• Difference between selling price and variable
  cost per unit is called the Contribution Margin
  (CM)

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• Income SX VX F
• In Net Income
• S Selling price
• X Units sold
• V Variable cost per unit
• F Total Fixed cost
• SX Total sales
• VX Total variable costs

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Single Product illustration (page 326)
Fixed Costs 187,500 Rooms 30 Average Selling
Price 40 Variable cost per unit 15 What is
number of room sales to Break Even? 187,500
187,500 BEP (40 - 15) BEP (100 -
38) In units
in 7,500 units 302,419
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Fixed Costs 187,500 Variable cost per unit
15 Average Selling Price 40
Rooms 30What is number of room sales units to
Break Even?

• Fixed costs / (selling price variable cost)
• 187,500 /(40 - 15)
• 187,500 / 25
• 7,500 units

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Fixed Costs 187,500 Variable cost per unit
15 Average Selling Price 40
Rooms 30What is room sales to Break Even?

• Fixed costs / CMR
• find cm
• Selling price variable cost
• 40 15 25
• Find cmr
• Cm / selling price 25 / 40 .625
• Fixed costs / CMR
• 187,500 / .625
• 302,419

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Fixed Costs 187,500 Variable cost per unit
15 Rooms 30 Average Selling Price
40Break Even room sales 7,500

• What is Occ at Break Even per month?
• Occ Rooms sold / Rooms available
• 7,500 / (365 x 30) 68.5
• What is Break Even number of rooms if want profit
  of 50,000?
• BE FC profit / selling price VC
• 187,500 50,000 / 40 - 15
• 237,500 / 25
• 9,500 rms

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Margin of safety

• Excess of sales above break even point

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Sensitivity analysis

• Increase or decrease sales price and determine
  new results
• Increase or decrease variable costs and determine
  new results
• Increase or decrease fixed costs and determine
  new results

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Multiple products

• Use weighted average for contribution margin

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Operating leverage

• High operating leverage (highly leveraged)
• Fixed costs high, variable costs low
• Small increase in sales large increase in net
  income
• Below break even, large loss
• Low operating leverage
• Fixed cost low, variable costs high
• Small increase in sales small increase in net
  income
• Below break even, small loss

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Leverage
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Leverage exampleWhich hotel is more highly
leveraged?

• Property A Property B
• Sales 500,000 100 500,000 100
• VC 300,000 60 200,000 40
• FC 200,000 40 300,000 60
• Income
• What is Break Even Sales for each hotel?
• What is the Contribution Margin Ratio for each
  hotel?
• 1st find CM Hotel A (500 300 200)
• Then find CMR CM /selling price (200/500.4)
• CMR Sales VC (A 100 60 40) (B 100-4060)
• Hotel A will earn 40 cents for every dollar past
  BE,
• but it will also LOSE 40 cents of every dollar
  BELOW BE
• Hotel B will earn 60 cents for every dollar above
  BE, but is go below BE, it will LOSE 60 cents
• Q-Which is leveraged higher?
• Property B is higher leveraged than A

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Homework Chapter 7

• Problems
• 1, 3-13, 4

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Problem 1 Selling price 10.25 same
Variable costs 5.25 increases 0.25
Fixed Costs 20,000
increases by 2,000

• 1. Break Even pt. in meals sold
• Fixed cost / Contribution Margin
• Fixed cost / (selling price - variable costs)
• 20,000 / 10.25 5.25
• 20,000 / 5.00 4,000 meals
• 2. Break Even pt. in food revenue
• Fixed cost / Contribution Margin Ratio (CM /
  selling price)
• 20,000 / (5.00/10.25)
• 20,000 / .488 40,984

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Problem 1 Selling price 10.25 same
Variable costs 5.25 increases 0.25
Fixed Costs 20,000
increases by 2,000

• 3. Expected Break Even pt. in meals
• Fixed costs/contribution margin
• Fixed costs / (selling price-variable costs)
• 22,000/10.25 5.50
• 22,000 / 4.75 4,632 meals
• 4. Expected BE pt. in food revenue
• Fixed cost / Contribution Margin Ratio (CM /
  selling price)
• 22,000 / (4.75/10.25)
• 22,000 / .46 47,826

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Problem 3

• 1.Fixed costs / CMR
• 100,000 / 0.2 500,000
• 100,000 50,000 / 0.2 750,000
• 3.Fixed costs / CMR
• 100,000 / .25 400,000
• 100,000 50,000 / 0.25 600,000

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Problem 4

• 1. Fixed Costs / (100 Var Costs )
• 120,000 / (100-70)
• 120,000 / 0.3 400,000
• 2. FC investment / (100 VC)
• 120,000 37,500 / (100 70)
• 157,500 / 0.3
• 525,000