Reference no: EM132485277

Question - Jill Hayes operates a bed and breakfast hotel in a resort area in the Smoky Mountains. Depreciation on the hotel is $60,000 per year. Jill employs a maintenance person at an annual salary of $32,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,000 per year. The rooms rent at an average price of $60 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $8.00 per person per night and the cost of food which is $4.00 per person per night.

Instructions -

(a) Determine the number of rentals and the sales revenue Jill needs to break even using the contribution margin technique.

(b) If the current level of rentals is 3,000, by what percentage can rentals decrease before Jill has to worry about having a net loss?

Melbourne Corporation has traditionally made a subcomponent of its major product. Annual production of 30,000 subcomponents results in the following costs:

Direct materials $250,000

Direct labor $200,000

Variable manufacturing overhead $190,000

Fixed manufacturing overhead $120,000

Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each year at a price of $28 per unit. Melbourne knows that the facilities now being used to manufacture the subcomponent could be rented to another company for $80,000 per year if the subcomponent were purchased from the outside supplier. There would be no effect of this decision on the total fixed manufacturing overhead of the company. Assume that direct labor is a variable cost.

(c) Advise whether Melbourne should make or buy the sub-compoment.