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In calculating the incremental cash flows for the hotel and water park, I couldn’t understand on how to get “Gas – variable ($20,000 – $10,200)*1.5” (hotel). How to get the $10,200? Same goes to the water park, “Gas – variable ($18,000 – $8,500)*1.5”. How to get the $8,500? I don’t understand what are we subtracting it with?
Thank you in advance.
The power cost for the hotel was $20,000. According to note 3 of the question this was for gas and electricity. There is a fixed monthly charge of $8,000 for electricity and $2,200 for gas, so a total fixed charge of $10,200. This will be payable whether or not the hotel stays open in January, so there is no extra cost of staying open.
The remainder of the amount (20,000 – 10,200 = $9,800) is the variable cost for gas. If they close the hotel then none of this is payable. If they stay open then all of it is payable and will be 50% higher because of the cold weather and so will be 9800 + (50% x 9800) = $14,700. So this is the extra cost of staying open.
It is the same thinking for keeping the water park open.
With this question, I don’t get why ‘extras’ per room $20 not included in the Hotel revenue but $12 from water park is.
They include staffing costs as well. I understand why they include the temporary staff but why have they included the fixed salaries of the head chef, and hotel manager? These are not relevant as they are paid these salaries regardless of hours? Can anyone clarify which cost this would come under?
Ah never mind, I understand they actually subtracted this off of the total staffing costs to calculate the temp staff costs.
In calculating the incremental running costs of the water park how did they get 75600-2000 x 48% , where did the 48% come from??
The 48% represents the proportion of the total cost that is variable or subject to change based on certain conditions. In the context of calculating incremental running costs, this percentage is applied to the difference between the total cost ($75,600) and the base cost ($2,000) to determine the variable portion of the cost that will be incurred if the water park remains open.
So, calculation $75,600 – $2,000 x 48% is used to find the incremental cost that is variable and will be incurred due to the decision to keep the water park open.
The security cost is zero when the hotel or park is closed because no changes will be made to the current arrangements for security while the premises are empty. This means that there is no extra cost incurred for security whether the premises are open or closed.
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