Suppose a hotel has annual fixed costs applicable to its rooms of $2.5 million for its 250-room hotel. Average daily room rents are $65 per room and average variable costs are $15 for each room rented. It operates 365 days per year. If the hotel is completely full throughout the year, what is net income for one year?

A) $1,275,000

B) $1,780,500

C) $2,062,500

D) $2,225,750

Option (C) is correct.

Explanation:

Given that,

Total Fixed cost = $2,500,000

Total number of rooms = 250

Number of days in a year = 365

Daily rent per room = $65

Variable cost per room = $15

Contribution margin per room:

= Daily rent - Variable cost per room

= $65 - $15

= $50

Total contribution margin for the year:

= Number of days in a year × Contribution margin per room × Total number of rooms

= 365 × $50 × 250

= $45,62,500

Therefore, the net income for one year is calculated as follows:

= Total contribution margin for the year - Fixed cost

= $4,562,500 - $2,500,000

= $ 20,62,500