MGS 3100 Business Analysis

Exercise – Breakeven/Crossover/ Pricing Analysis

You own a motel with 120 rooms. Fixed daily cost for Mortgage is $1400 Other fixed costs including staff salaries, maintenance add up to $600 per day. Variable cost per room is $20 per room per day (includes room cleanup). You charge a price of $70 per room per day.

1. Draw an influence diagram leading up to your profit.

2. What is the breakeven point? (That is, how many rooms must be occupied for you to breakeven?)

• Define the random variable X.
• Express Total Revenue, Fixed cost, Variable cost, Total cost, and Profit in terms of X.
• Calculate Breakeven point.

3. Draw a graph of Revenue and Total Cost against the number of rooms,

4. Draw a graph of Profit against the number of rooms.

5. You have the option of subcontracting to improve room quality and the surroundings, but that would increase fixed costs to $3750, with no change to variable costs. You will, however, be able to charge $95 per room per day. At what point will you be indifferent between your current mode of operation and the new option?

6. Draw graph showing the profit lines for the two options.

7. See workbook

8. See workbook

9. If the demand for rooms depends on the price as follows:

Demand = 180 - 2*price,
what price would you charge for a room?

Assume that FC is still $2000 and VC = $20/unit, as in the original problem.

10. Draw a graph showing how profit varies with the price.