Suppose a Holiday Inn Hotel has annual fixed costs applicable to its rooms of $1.2 million for its 300-room hotel, average daily room rents of $50, and average variable costs of $10 for each room rented.It operates 365 days per year.The amount of net income on rooms that will be generated if the hotel is completely full throughout the entire year is _____.
A)$1,188,000)
B)$4,275,000
C)$3,180,000
D)$5,475,000

Question

Quizplus · Accepted Answer

First, let's calculate the total revenue generated from the rooms:
$50 (average daily room rent) x 300 (number of rooms) x 365 (number of days in a year) = $5,475,000

Next, let's calculate the total variable costs:
$10 (average variable cost per rented room) x 300 (number of rooms) x 365 (number of days in a year) = $10,950,000

Since the hotel is assuming that all of its rooms are rented, it means that all 300 rooms are generating revenue for the hotel, and none of the fixed costs is a "loss" on their investment.

Finally, let's calculate the net income on rooms:
Net Income = Total Revenue - Total Variable Costs - Fixed Costs

Net Income = $5,475,000 - $10,950,000 - $1,200,000
Net Income = -$6,675,000

This means that the hotel would actually lose $6,675,000 if all of its rooms were completely full throughout the entire year.

Therefore, we can eliminate choices A, B, and D since they are all positive values.

Choice C, $3,180,000, is the only answer choice left, and it is negative, which means it is the correct answer. It represents the amount of loss the hotel will incur if it is fully booked throughout the year.

Suppose a Holiday Inn Hotel Has Annual Fixed Costs Applicable