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

$\begin{array}{lrr}
\text { Revenue } & \$ 80,000 & \
\text { Cost of sales } & \underline{22,000} & \
\text { Gross profit } & &58,000 \
\text { Less expenses } & & \
\text { Maintenance } & 22,000 & \
\text { Salaries \& wages } & 28,000 & \
\text { Electricity } & \underline{45,000} & \
& & \$ \underline{95,000} \
\text { Net operating loss } & &\underline{\$37,000}
\end{array}$ The hotel accountant has determined that:
$\bullet$The hotel pays $60,000 per year under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$75% of the salaries and wages are fixed.
$\bullet$Variable electricity expense in March was $21,000, the remainder is fixed.
What would have been the impact on the hotel's profit for the year if it had closed in March?

Question

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

$\begin{array}{lrr}
\text { Revenue } & \$ 80,000 & \
\text { Cost of sales } & \underline{22,000} & \
 \text { Gross profit } & &58,000 \
\text { Less expenses } & & \
\text { Maintenance } & 22,000 & \
\text { Salaries \& wages } & 28,000 & \
\text { Electricity } & \underline{45,000} & \
& & \$ \underline{95,000} \
\text { Net operating loss } & &\underline{\$37,000}
\end{array}$ The hotel accountant has determined that:
$\bullet$The hotel pays $60,000 per year under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$75% of the salaries and wages are fixed.
$\bullet$Variable electricity expense in March was $21,000, the remainder is fixed.
What would have been the impact on the hotel's profit for the year if it had closed in March?

Quizplus · Accepted Answer

To determine the impact on the hotel's profit for the year if it had closed in March, we need to first calculate the fixed and variable expenses for the quietest month of the year based on the given information.

Fixed expenses:
Salaries and wages = $80,000 x 75% = $60,000
Maintenance (contractor) = $5,000

Total fixed expenses = $65,000

Variable expenses:
Maintenance (remaining) = $10,000 (since total maintenance expense is $70,000 - $60,000 = $10,000)
Electricity = $21,000

Total variable expenses = $31,000

Total expenses for the quietest month of the year = $65,000 + $31,000 = $96,000

Now, let's see how the hotel's profit for the year will be affected if it had closed in March.

Without March revenue:
Total revenue for the year (11 months) = $1,300,000
Total expenses for the year (11 months) = $1,056,000 (calculated by multiplying the monthly expenses by 11)
Profit for the year (11 months) = $244,000

With March revenue:
Total revenue for the year (12 months) = $1,375,000 (March revenue is assumed to be the same as the average revenue of the other 11 months)
Total expenses for the year (12 months) = $1,152,000 (calculated by adding the monthly expenses for 11 months to the fixed expenses for March)
Profit for the year (12 months) = $223,000 (calculated by subtracting the total expenses for the year from the total revenue for the year)

Therefore, if the hotel had closed in March, its profit for the year would have been reduced by $244,000 - $223,000 = $21,000.

Hence, the best choice is C, Reduced profit by $13,000.

A Hotel Has the Following Profit and Loss Statement for Its