C4_solutions5_9_aug_19_2009 - CHAPTER4 Q&A:(CVP...

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        CHAPTER 4 Q&A : COST-VOLUME-PROFIT ANALYSIS      (CVP) CVP Solutions (19 th  Aug 2009)      QUESTION 5 :  (Single product, service sector) Ixora Inn is a small bed-and-breakfast inn in Bukit Tinggi, Pahang. The charge is RM 100 per person  for one night's lodging and breakfast in the morning. The retired couple who own and manage the inn  estimate that the variable expense per person is RM 40. This includes such costs as food and utilities.  The inn's fixed costs total RM 84,000 per year. The inn can accommodate 10 guests each night. Required: a) Compute the contribution margin per unit of service (A unit of service is one  night's lodging for one guest).        CM = RM 100 - RM 40 = RM 60  b) Compute the contribution margin ratio.        CM ratio = RM 60/RM100 = 0.6 c) What is the annual break-even point in units of service and in RM of service  revenue.        B-E point = RM 84,000/RM60 = 1,400 guests at one night's lodging for  each guest        B-E point in revenue = RM 84,000/ 0.6= RM 140,000 d) Compute the number of units of service to earn a target net profit of RM 120,000  for the year (Ignore income taxes).       Number of units of service required = RM (84,000 + 120,000)/RM 60 =  3,400 guests at one night's lodging per guest e) Some critics of CVP analysis claim that "CVP analysis is an over simplification  of the real world. For this reason, it has little to offer the decision maker". Briefly  comment and justify your answer.
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