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

$\begin{array}{lrr}
\text { Revenue } & \$ 100,000 & \
\text { Cost of sales } & \underline{34,000} & \
\text { Gross profit } & & 66,000\
\text { Less expenses } & & \
\text { Maintenance } & 24,000 & \
\text { Salaries } & 32,000 & \
\text { Electricity } & \underline{55,000} & \
& & \underline{111,000} \
\text { Net operating loss } & & \underline{45,000}
\end{array}$ The hotel accountant has determined that:
$\bullet$The hotel pays $10,000 per month under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$50% of salaries are fixed.
$\bullet$Variable electricity expense in February was $25,000, 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

$\begin{array}{lrr}
\text { Revenue } & \$ 100,000 & \
\text { Cost of sales } & \underline{34,000} & \
\text { Gross profit } & & 66,000\
\text { Less expenses } & & \
\text { Maintenance } & 24,000 & \
\text { Salaries } & 32,000 & \
\text { Electricity } & \underline{55,000} & \
& & \underline{111,000} \
\text { Net operating loss } & & \underline{45,000}
\end{array}$ The hotel accountant has determined that:
$\bullet$The hotel pays $10,000 per month under a maintenance agreement to a contractor. The remaining maintenance expense is variable.
$\bullet$50% of salaries are fixed.
$\bullet$Variable electricity expense in February was $25,000, 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 of closing in February, we need to analyze the fixed and variable expenses.

Fixed expenses: 
- Maintenance agreement: $10,000
- 50% of salaries: $12,000 (50% of $24,000)
- Rent: $20,000
Total fixed expenses: $42,000

Variable expenses: 
- Cost of goods sold: $35,000
- Variable maintenance: Unknown
- Electricity (fixed portion): $10,000 ($35,000 - $25,000)
Total variable expenses: Unknown

Profit for February would be:

Revenue ($80,000) - Cost of goods sold ($35,000) - Fixed expenses ($42,000) - Electricity (fixed portion) ($10,000) = -$7,000

If the hotel had closed in February, it would have saved the variable expenses and the negative profit. However, it would also lose the revenue for the month.

Assuming that revenue for February is consistent with the rest of the year, the impact on the hotel's profit for the year would be:

Lost revenue ($80,000) - Variable expenses (Unknown) = Reduced profit for the year

We don't know the variable expenses for the year, but we can assume that they are similar to February. Therefore, the best estimate would be:

Lost revenue ($80,000) - Variable expenses ($35,000) = Reduced profit for the year: $45,000

The difference between the profit for the year with and without February would be:

$45,000 - $34,000 = $11,000

Therefore, the answer is C) Reduced profit by $11,000.

A Hotel Has the Following Profit and Loss Statement for Its