Microeconomics,, 16th Canadian Edition

Season Total

Revenue

(TR)

Total

Variable

Cost

(TVC)

Contribution

to Fixed

Costs (TR –

TVC)

Total

Fixed

Costs

High-

Season

580 000 360 000 220 000

Off-

Season

200 000 180 000 20 000

Total 780 000 540 000 240 000 240

000

If the Seaside Inn were to charge the same rates during the off-
season, it could not attract enough customers even to cover its
costs of housekeepers, receptionists, and managers. However,
the hotel discovers that by charging lower rates during the off-
season, it can rent some of its rooms and earn revenues of
$200 000. Its costs of operating (variable costs) during the off-
season are $180 000. So, by operating at reduced rates in the
off-season, the hotel is able to contribute another $20 000
toward its annual fixed costs, thereby eliminating the shortfall.