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Cost-Volume-Profit Analysis Problems

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As the tax rate is 30%, it is necessary to say that first of all the sales level should at least enable the COB to minimize costs directed for tax payments. Secondly, it should gradually form a basis for further investments and necessary purchases. A required sales level is also depends on the terms outlined for achieving goals described. Moreover, it is necessary to check not only the property of the hotel but its stability rate. In other words, it is necessary to identify and examine previous experience of the hotel’s management team to cope with crisis, whether it has or had any supportive agreements or at least relationships with stakeholders. However, several crucial aspects dictate the required sales level. They are the terms for achieving given goals, abilities to work stable in critical situations, and current and past relationships, which may support and cooperate with the hotel. These factors are important because of their direct connection to the ability of paying taxes with minimal losses for the COB. Thus, the tax rate is the main issue on which the further investments and purchases of the hotel depend.

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Firstly, the L&M Inn suffers from the basic problem, i.e. the irrational use of costs. The costs spent on food are too high and, as a result, the prime cost per unit of product becomes less, which leads to losses increased by taxes. Therefore, such taxes are set due to the high number of the costs aimed for food purchase and its following serving. The breakeven will occur only in case when the rational food purchase will simultaneously increase the prime cost of the dishes served and decrease taxes for an amount of food used for serving. If the fixed cost lease were traded for a variable lease of 20% of total sales, the breakeven point would be still unachievable because 20% is not sufficient for starting L&M Inn making profits. It is obvious that taxes rate could be diminished. However, it means only the possibility to save some costs and invest them in some spheres, which require improvements. In such a way, it could cause a breakeven, which is though still not possible without reasonable cost management and consequently relative tax rates. Overall, L&M Inn needs to reorganize its cost use and prepare more eligible base for tax paying. Both Mackinaw and Minier Hotels are the result of the inappropriate cost use, which consequently leads to such losses. However, the latter can be turned into profits in case if both of the hotels change their cost spending strategy to make the fixed annual costs much lower. The sales level depends on how efficiently invested costs are working. Consequently, the CVP for both hotels is based on the rule according to which the amounts of services provided previously should use less costs without minimizing of quality of the service.

The lower are costs used per service, the higher are the hotel profit. It is important to note, that the cost-spending plan is supposed to be redesigned, though it does not mean to substitute previous means of providing services with less qualitative and eligible ones. According to the actual fixed annual costs, the costs spent on tax payment by Mackinaw Hotel are relatively higher. Its CMRw is 10% higher than CMRw of Minier Hotel. It means that Mackinaw Hotel is less likely to obtain a breakeven in such circumstances. Moreover, it requires some changes in terms of the cost and resource management. 

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