Reference no: EM132467708

Problem - January 2018. The GM has asked you to prepare a CVP analysis to aid in discussing next year's financial expectations at the upcoming Area Managers' Meeting. The meeting brings together 45 hotel managers and three district managers from the Southwest Region. We discussed that break-even sales volume is computed using fixed costs and the unit contribution margin. Since you will be forecasting break-even for this year (2018), you need to make several adjustments to the three years of historical data you obtained. These adjustments are described as follows:

Price. You examine the average selling price (i.e., average daily rate) for the past two years and decide that the hotel's room rate for next year will continue the same trend; in other words, you will realize the same percentage increase (or decrease) that was experienced in the past year. For example, if your rate increased 8% from 2016 to 2017, you will then forecast the 2018 room rate to be 8% above 2017's room rate.

Costs. Your hotel's variable and fixed costs are obtained from the cost drivers. After consultation with industry experts, you predict fixed costs will be the same next year. Further, you expect the variable cost per room-night to increase 4% due to inflation. 4 CBM 188: Advanced Accounting for Decision Makers Individual Coursework [60%] Based on your analysis of local market data, you believe that sales volumes will remain flat; that is, the number of rooms rented in 2018 will be unchanged from the 2017 sales volume.

Required - Perform CVP analysis to calculate the break-even sales volume for 2018. Discuss the pros & cons and make recommendations for improvement.