1) Last year (before Maggie) what was breakeven (in room/nights and $s)? Did they make a profit? What was the maximum profit that could be made?
Per information given,
Number of rooms available for rent = 5 (This number remains same before and after hiring Maggie. Last year, Phil And Carol occupied one room to throw cocktail parties and this year Maggie occupies one room)
Fixed Expenses = $27,239
Variable Expenses = $3,729
Sales Revenue = $30,000
At break-even, Sales Revenue is equal to the sum of Fixed Expenses and Variable Expenses.
Therefore, $85 * Q = $27,239 + $3,729
Q = 30968/85
Q = 364
So, to break even they should rent 364 rooms per year, which means they should rent out one room daily. The break even in dollars is $30,968.
The Snow Gees Inn was operating at loss last year.
If all the available rooms are rented out on all 365 days of an year, the revenue would be 365 * 5 * $85 = $155,125.
Number of rooms rented in the previous year = 30,000/85 = 353
So, Variable expense per room = $3,729/353 = $10.56
Therefore, total Variable Expense = $19,272
So, maximum profit that could be made is $93,614. (Difference of revenue and expenses)
2) With Maggie, what is the new breakeven? Is this a realistic possibility? What should
Fixed Expenses = $34,739
Variable Expenses = $10.56Q + 35% of Sales Revenue > $25,000
= $10.56Q + (85*Q – $25,200)* 35/100
= 10.56Q + 29.75Q – 8750
= 40.31Q – 8750
So, $85 * Q = $34,739 + 40.31Q – 8750
44.69Q = $25,989
Q = 582
So, to break even they should rent 582 rooms per year, which means they should rent out at least two (1.59) rooms daily.
The break even in dollars is $49,470.
The new breakeven of 582 rooms per year is too high when compared to the last year’s 353 rooms rented out. Already, the Inn was operating at loss last year by short of 11 nights from break even and now instead of cutting down expenses and trying to increase revenues, they are increasing the expenditure. However, if hiring Maggie is unavoidable, as the inn was already making revenue of $30,000 a year, paying Maggie commission on sales of $25,000 is not really necessary. If Snow Geese Inn has to encourage Maggie to work in a way profitable to the inn, they should set a higher sales amount on which Maggie can receive commission. I would suggest to give Maggie the 35% commission only when Maggie is able to generate profits, i.e. Maggie will receive 35% of the profits as commission rather than 35% of revenues greater than $25,000.
Fixed Expenses = $34,739
Variable Expenses = $10.56Q
85 * Q = 10.56Q + $34,739
Q = 467
To break even they should rent 467 rooms per year. The break even in dollars is $39,695. So, Maggie will receive 35% of revenues which exceed $39,695.
Another option Snow Geese Inn may consider to increase profits is to raise the room price to $109 by assuming they will be able to rent out same 353 rooms this year as well.
$109 * Q = 10.56Q + $34,739
Q = 353
The break even in dollars is $38,477. So, Maggie will receive 35% of revenues which exceed $38,477. However, Snow Geese should consider this option only if it doesn’t have any competitors in that area who can offer same facilities at lesser price. The Inn should also consider improving their marketing techniques to attract more customers.
The Snow Geese should try implementing the above suggestions depending on the demand predicted and the regional competition they have. If they plan not to implement the above suggestions, it is not advisable for Snow Geese Inn to remain in business. The predicted break even for second year is not realistic to achieve at current price and expenditures.