A hotel has the following profit and loss statement for its quietest month of the year.
Gala Hotel Ltd
Profit and Loss Statement for February

$\begin{array}{lrr}
\text { Revenue } & \$ 100,000 & \
\text { Cost of sales } & 34,000 & \
\text { Gross profit } & & 66,000 \
\text { Less expenses } & & \
\text { Maintenance } & 24,000 & \
\text { Salaries } & 32,000 & \
\text { Electricity } & \underline{55,000} & \underline{111,000} \
\text { Net operating loss } & & \underline{45,000}
\end{array}$ The hotel accountant has determined that:
$\bullet$The hotel pays $8,000 per month under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$Salaries are all fixed.
$\bullet$Variable electricity expense in February was $20,000, the remainder is fixed.
What would have been the impact on the hotel's profit for the year if it had closed in February?

Question

A hotel has the following profit and loss statement for its quietest month of the year.
Gala Hotel Ltd
Profit and Loss Statement for February

$\begin{array}{lrr}
\text { Revenue } & \$ 100,000 & \
\text { Cost of sales } & 34,000 & \
\text { Gross profit } & & 66,000 \
\text { Less expenses } & & \
\text { Maintenance } & 24,000 & \
\text { Salaries } & 32,000 & \
\text { Electricity } & \underline{55,000} & \underline{111,000} \
\text { Net operating loss } & & \underline{45,000}
\end{array}$ The hotel accountant has determined that:
$\bullet$The hotel pays $8,000 per month under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$Salaries are all fixed.
$\bullet$Variable electricity expense in February was $20,000, the remainder is fixed.
What would have been the impact on the hotel's profit for the year if it had closed in February?

Quizplus · Accepted Answer

To determine the impact on the hotel's profit if it had closed in February, we need to calculate the total fixed and variable expenses for the month of February and subtract them from the revenue for that month.

Total variable expenses for February = $20,000 (electricity)

Total fixed expenses for February = $8,000 (maintenance agreement) + all salaries

Total revenue for February = $100,000

Therefore, profit for February = $100,000 - $20,000 - $8,000 - all salaries

If the hotel had closed in February, the fixed expenses would still need to be paid, but there would be no revenue. Therefore, the profit for the year would be reduced by the profit for February.

Assuming the hotel's profit margins are similar in other months of the year, the impact on the hotel's profit for the year would be:

Profit for the year = 11 x (February profit) = 11 x ($100,000 - $20,000 - $8,000 - all salaries)

If the hotel had closed in February, the profit for the year would be reduced by:

11 x ($100,000 - $20,000 - $8,000 - all salaries) = $1,022,000 - 11 x all salaries

Therefore, the impact on the hotel's profit for the year depends on the total salaries paid. Since all salaries are fixed, we cannot determine the exact impact without more information. However, we do know that the impact on the profit for the year would be greater than the profit for February ($72,000), which eliminates choices D and E. 
Out of the remaining choices, B is the closest estimate to the actual impact, as it assumes that the total salaries paid are $30,000 per month, which would result in a profit reduction of $330,000 for the year ($30,000 x 11).

A Hotel Has the Following Profit and Loss Statement for Its