1. Total costs:
Bank loan (£250,000 @ 9%) 22,500
Depreciation 40,000
Other fixed costs 65,000
Operating expenses 85,000
Total costs 212,500
After-tax profit sought by owners = £450,000 × 0.15 = £67,500.
Before-tax profit needed to provide after-tax profit of £67,500 =£135,000 (tax is 50%).
Total revenue needed to provide before tax profit of £135,000 =
Total costs + desired before-tax profit, i.e. £212,500 + £135,000 = £347,500
Room rate = Total revenue ÷ Room nights sold in a year
Room nights sold in a year = 40 × 0.55 × 365 = 8,030
Room rate = £347,500 ÷ 8,030 = £43.27
2. (a) Profit = Revenue – Variable costs – Fixed costs
Contribution = Revenue – Variable costs
In this problem Variable costs are 75% of Revenue,
- Contribution = 25% of Revenue
We can therefore say:
Target profit = 0.25 of Revenue – Fixed costs, or:
50% of $120,000 = 0.25R – ($55,000 + $8,000 + $30,000 + $5,000 + $6,000 + $4,000 + $28,000)
$60,000 + $136,000 = 0.25R,
$196,000 ÷ 0.25 = R
R = $784,000
Answer: Total revenue of $784,000 will provide a 50% before-tax return on the owners’ investment of $120,000.
(b) Total number of weekdays restaurant is open = 49 × 4 = 196.
Total number of weekday covers sold = 196 × 50 × 2 = 19,600.
Total number of Saturdays and Sundays restaurant is open = 49 × 2 = 98.
Total number of weekend covers sold per annum = 98 × 50 × 3 = 14,700
Total number of covers sold per annum = 19,600 + 14,700 = 34,300
- average selling price per cover to provide target profit = $784,000 ÷ 34,300 = $22.86
3. (a) Total investment in rooms = $12,600,000 (70% of $18 m).
Average room investment = $140,000 ($12.6 m ÷ 90).
Average room rate = $140 ($140,000 ÷ 1,000).
(b) Revenue required per day = $3,066,000/365 = $8,400
Let M represent price charged per square metre.
(21 × 60M) + (21 × 80M) + (21 × 110M) = $8,400
1,260 M + 1,680M + 2,310M = $8,400
5,250M = $8,400
M = $1.6
For the economy rooms the rate should be: $1.6 × 60 = $96.
For the double rooms the rate should be: $1.6 × 80 = $128.
For the deluxe rooms the rate should be: $1.6 × 110 = $176.