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In 2013, the Uxbridge Travelodge had a margin of safety of 1,400 rooms - Edexcel - GCSE Business - Question 6 - 2016 - Paper 1
Question 6
In 2013, the Uxbridge Travelodge had a margin of safety of 1,400 rooms. (a) What is meant by the term margin of safety? The Uxbridge Travelodge has annual fixed co... show full transcript
Worked Solution & Example Answer:In 2013, the Uxbridge Travelodge had a margin of safety of 1,400 rooms - Edexcel - GCSE Business - Question 6 - 2016 - Paper 1
Step 1
What is meant by the term margin of safety?
Answer
The 'margin of safety' refers to the difference between the actual level of output and the break-even level of output. In this context, it indicates how many more rooms the Uxbridge Travelodge can sell before it reaches the break-even point, highlighting its financial buffer.
Step 2
(i) Calculate how many hotel rooms had to be sold in 2013 for the Uxbridge Travelodge to break-even. Show your workings and the formula used.
Answer
To calculate the break-even point, we use the formula:
ext{Break-even} = rac{ ext{Total Fixed Costs}}{ ext{Selling Price per Room} - ext{Variable Cost per Room}}Substituting the values:
- Total Fixed Costs = £100,000
- Selling Price per Room = £50
- Variable Cost per Room = £10
So,
ext{Break-even} = rac{100,000}{50 - 10} = rac{100,000}{40} = 2,500 ext{ rooms}Thus, the Uxbridge Travelodge needs to sell 2,500 rooms to break-even.
Step 3
(ii) Calculate the profit of the hotel in 2013. Show your workings and the formula used.
Answer
To calculate the profit, we first need to find the total revenue and total costs:
-
Total Revenue = Selling Price per Room * Number of Rooms Sold
- Total Revenue = £50 * 3,900 = £195,000
-
Total Costs = Fixed Costs + (Variable Cost per Room * Number of Rooms Sold)
- Total Costs = £100,000 + (£10 * 3,900) = £100,000 + £39,000 = £139,000
-
Profit = Total Revenue - Total Costs
- Profit = £195,000 - £139,000 = £56,000
Thus, the profit of the hotel in 2013 is £56,000.