Skyview Manor

1075 Words May 1st, 2014 5 Pages
Question 1— On average, how many rooms must be rented each night in season for the hotel to breakeven?

Calculating the break-even occupancy level requires splitting the costs in Exhibit 1 into the fixed and variable components:
a) Variable Costs:
Cleaning supplies
$ 1,920
Linen service
$13,920
1/2 Misc. expense
$ 3,657
$19,497
b) Per Occupied Room Night = $19,497 ÷ 7,680 (120 80 80%)
= $2.54
c) Contribution Margin:
Average revenue $160,800 ÷ 7,680 = $20.94
Revenue - Variable Cost = $20.94 -$2.54 = $18.40
d) Fixed Costs:
Total Costs - Variable Costs = Fixed Costs
$138,410 - $19,497 = $118,913
e) Break Even = $118,913 / $18.40 = 6,463 room nights
Per night (÷ 120) = 54 rooms (68% occupancy)

Skyview 1

Skyview 2
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Depreciation of $30,000 with a 15 year life implies buildings & furnishings of
$450,000.

Skyview 8

2. Interest expense of $21,716 for the first year at 5% interest implies an average one year old mortgage balance of about $434,000 [beginning balance (new mortgage) of $440,000 and ending balance of $430,00]. Assuming a normal mortgage limit of
80% of value, the property is worth about $550,000.

3. This would imply about $100,000 for non-depreciable land (550,000-450,000), which seems reasonable.

4. There is probably very little working capital investment here—no receivables, very little inventory, and perhaps some modest accruals for wages, payroll taxes and miscellaneous bills. We would estimate a net of about zero, except for cash.

5. The cash balance would have to be large enough to support the float on day to day operations over the year. Exhibit 1 here is a rough estimate of cash flows over the twelve months. The business would need about $55,000 in cash at the end of a season (April 1) to carry it through until December (including a 10% cushion). From December to March, the business probably needs about $20,000 in cash at any time (roughly, 1 month’s payments plus a 10% cushion). Thus, at
March 31 we would estimate a cash balance of probably $55,000

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