Break-Even Analysis: How Many Rooms Does a Hotel Need?
Beginner9 min readFor students & players
The break-even point is the level of sales where a business stops losing money: revenue exactly covers costs. It answers the most important question for any new business — “how much do we need to sell to survive?”
The break-even formula
Break-even units = Fixed costs ÷ Contribution per unit.
Contribution per unit is the price minus the variable cost of one unit. For a hotel room the variable cost per night is small, so the contribution is close to the room price.
Worked example
Take a small hotel with $275 of fixed costs per day (wages, upkeep, property tax) and Standard rooms at $80 a night. Treat the room price as its contribution:
- Break-even = $275 ÷ $80 = 3.4 rooms per night
- So the hotel needs 4 booked rooms every night just to stop losing money.
With exactly 4 rooms, the hotel only breaks even when it is completely full. Any empty room means a loss. That is a fragile business: it has no margin of safety.
Adding capacity: does one more room pay?
A new Standard room costs $10,000 to build. It adds $12 of upkeep and about $8 of property tax per day, so $20 of new fixed cost. If it is booked at $80, it adds $60 of profit a night.
| Question | Answer |
|---|---|
| Extra profit per booked night | $80 − $20 = $60 |
| Payback period | $10,000 ÷ $60 ≈ 167 nights |
| At a better price of $94 | $10,000 ÷ $74 ≈ 135 nights |
Notice how a better price shortens the payback by a month. Price and capacity decisions are linked.
Margin of safety
The margin of safety is how far sales can fall before you hit break-even. A hotel with 10 rooms that breaks even at 4 booked rooms has a margin of safety of 6 rooms — it can survive a quiet winter. A hotel that breaks even only when full has none.
🏨 Try it in the game
- Start a free hotel. Open the Finance tab and note your daily costs.
- Divide them by your room price: that is your break-even number of rooms.
- Build rooms until your break-even is below 60% of your rooms. How many days did it take?
- Watch the tip on the Overview: when you lose money, the game estimates how many more rooms you need to break even. Does it match your calculation?
Questions to check your understanding
- A café has $600 of fixed costs a day and earns $3 contribution per coffee. What is its break-even?
- Why does a higher price lower the break-even point?
- Hotel A breaks even at 8 of 10 rooms, hotel B at 8 of 20. Which is safer in a recession, and why?
FAQ
- What is the difference between break-even and payback?
- Break-even is the sales level where revenue equals costs in a period. Payback is how long an investment takes to earn back what it cost.
- Does break-even include taxes?
- Usually it is calculated before profit tax, because profit tax only applies once there is profit.
The game is a simplified model of running a hotel: it shows cause and effect, not real industry benchmarks.