Fixed Costs are expenses that generally remain stable over a defined period, regardless of short-term changes in hotel occupancy or business volume. These costs do not increase or decrease directly with every additional room sold, although they may change over time or when operating capacity changes.
How It Works
In a hotel, fixed costs may include certain management salaries, insurance premiums, property taxes, software subscriptions, and contractual service fees.
The distinction between fixed and variable costs depends on the time period, the hotel’s operating structure, and the specific expense being analyzed. Some costs are semi-variable, combining fixed and variable components.
Practical Example
A hotel pays CAD 12,000 per month for a software subscription and a fixed service contract.
If the hotel sells 1,000 room nights during the month, these costs total CAD 12,000.
If the hotel sells 1,200 room nights the following month and the contract remains unchanged, the total cost is still CAD 12,000.
Fixed Cost per Sold Room Night = Total Fixed Costs ÷ Room Nights Sold
At 1,000 room nights: CAD 12,000 ÷ 1,000 = CAD 12 per sold room night.
At 1,200 room nights: CAD 12,000 ÷ 1,200 = CAD 10 per sold room night.
How to Interpret Fixed Costs
Fixed costs generally remain stable within a relevant operating range, but fixed cost per sold room night decreases as more room nights are sold, assuming total fixed costs remain unchanged.
Understanding fixed costs helps hotel managers assess operating leverage, plan budgets, and evaluate the financial impact of changes in occupancy and demand.
Related Terms
Variable Costs · Semi-Variable Costs · Operating Expenses · Contribution Margin · Gross Operating Profit (GOP) · Budget