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Hello sir in this question I cannot understand why maintenance cost is 10600 for hotel
If hotel is closed cost will be 4000
If hotel is open cost will be 14600
We should take the cost of maintenance when hotel is open which 14600
And in solution it’s say INCREMENTAL cost can you explain thisAnd also in answer revenue had contribution of EXTRAS but in cost EXTRAS Cost was not deducted why
As I explain in my free lectures, ‘incremental’ means ‘extra’. So in this question the incremental costs are the extra costs of keeping the hotel open.
The maintenance costs per month from the question are $14,600 if the hotel is open.
Per note (2) of the question the cost will be $4,000 is the hotel is closed.
Therefore the extra cost of keeping the hotel open is the difference of $10,600.
Contribution is the revenue less the variable costs. Therefore the extra contribution already takes into account the extra variable costs.
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