Welsh Hotel: Cost‐Volume‐Profit Analysis and Uncertainty

Hotels tend to have a high level of fixed costs, which means that high losses will result if revenue is significantly reduced below the break‐even point. Hence, the traditional cost‐volume‐profit (CVP) model,which is widely used within the hotel sector to determine break‐even analysis, is an important managerial tool. However, is the basic CVP model adequate, bearing in mind that certainty does not always exist during the decision‐making process? Examines the basic CVP model and describes how to include uncertainty during the decision‐making process. By way of illustration uses a hypothetical Welsh hotel, to show how to determine probability estimates for various desired profit levels. Also considers some of the other inherent operational difficulties of the basic CVP model.