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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.
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