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Skyview

Manor 1. On average, how many rooms must be rented each night in season for the hotel to breakeven? About 51 rooms must be rented each night during the peak season for the hotel to breakeven. Break-even number of rooms each night total sales Fixed costs Variable costs per room: Contribution margin CM Ratio Break-even in dollars Break-even ($/day) Break-even rev from dbl/day Number of doubles /day Break even rev from sgl/day Number of singles/day total number of rooms rooms East Wing West Wing Total Rooms available Avg Occupancy winter Winter days Manager annual salary Manager wife/day Desk clerk/day Maid/day Maids peak Payroll Taxes/Fringe Benefits Depreciation Property Taxes Insurance (Just Winter) Repairs and Maintenance (Just winter) # Rooms Rented in Winter at 80% Occupancy Cleaning Supplies/room Miscellaneous Fixed Miscellaneous variable Linen (just winter) Linen /double room Linen/single room Rooms rented telephones/room/month telephones: basic charge/month Telephones (just winter) Electricity/ available room (just winter) Interest on Mortgage Rooms Double rate 50 30 80 120 $ 15,000 20 24 15 4 20% $ 30,000 $ 4,000 $ 3,000 $ 17,204 7680 $ 0.25 $ 3,657 $ 3,657 $ 13,920 $ 1.51 $ 0.76 fixed variable variable variable fixed fixed partially variable partially variable dbl rate sgle rate 20 15 25 20 Single Rev 160800 $ 77,973 $ 60,437 $ 100,363 62% $ 124,927.10 $ 1,041.06 $ 832.85 $ 38 $ 208.21 12 50.63

3 variable 50 fixed 1160 $ 65 variable $ 21,716 fixed Dbl Rev single rate

East Wing West Wing Total rooms available Average Occupancy Rate Average Rate Avg Revenue/Day

50 30 80 80%

20 25 80% 21.75

640 480 1120

15 20 20% 16.875

120 96

216

2. The hotel is full on weekends in the ski season. If all room rates were raised $5 on weekend nights, but occupancy fell to 72 rooms instead of 80, what is the revised profit before taxes for the year, per Exhibit 1? If room rates were raised by $5 on weekend nights and occupancy fell, the revised profit before taxes would be $24,982. Manager Manager's Wife Desk Clerk Maids Payroll Taxes Depreciation Property Taxes Insurance (Just winter) Repairs (just winter) Cleaning Supplies Utilities Linen Service Interest Misc. Expenses Total Expenses Profit before Taxes Income Taxes Net Profit Weekend nights in winter Weekday nights in winter Weekend occupancy at regular rates weekday occupancy at regular rates Average Occupancy Average rate weekday average rate weekend Weekend total rooms Weekday total rooms 35 85 90% 69% 80% $ 20.78 $ 25.88 2520 4692 Revenue Expenses $ 162,681.30 Salaries $ 15,000 $ 2,400 $ 2,880 $ 7,200 $ 27,480 $ 5,496 $ 30,000 $ 4,000 $ 3,000 $ 17,204 $ 1,850 $ 6,360 $ 13,412 $ 21,716 $ 7,181 x x x x $ 137,699 $ 24,982 $ 11,992 $ 12,991

Weekday revenue weekend revenue Total Revenue Winter days Manager annual salary Manager wife/day Desk clerk/day Maid/day Maids peak Payroll Taxes/Fringe Benefits Depreciation Property Taxes Insurance (Just Winter) Repairs and Maintenance (Just winter) # Rooms Rented in Winter at 80% Occupancy Cleaning Supplies/room Miscellaneous Fixed Miscellaneous variable Linen (just winter) Linen /double room Linen/single room Rooms rented telephones/room/month telephones: basic charge/month Telephones (just winter) Electricity/ available room (just winter) Interest on Mortgage

$ 97,476.30 $ 65,205.00 $ 162,681.30 120 $ 15,000 fixed 20 variable 24 variable 15 variable 4 20% $ 30,000 fixed $ 4,000 fixed $ 3,000 partially variable $ 17,204 partially variable 7680 $ 0.25 $ 3,657 $ 3,657 $ 13,920 $ 1.51 $ 0.76 7212 3 variable 50 fixed 1160 $ 65 variable $ 21,716 fixed

3. What is the proposed incremental contribution margin per occupied room/day during the off-season? Here we are trying to determine how much incremental contribution to the profit per occupied room/day during the off-season. Contribution margin is determined as follows: Sales COGS variable operating expenses. The average revenue per occupied room/day is $14. 4. For each alternative in the case, list the annual expenses that are incremental to that decision alternative but are not related to the room/days occupied?

5. For each decision alternative calculate the occupancy rate necessary to break even on the incremental annual expenses. 6. What alternative do you recommend? Why? I recommend opening the west wing year round as only a 2% occupancy rate would justify doing this. I would hold off on building the pool as it is a major capital expenditure and makes it much riskier that it will breakeven on the investment. Moreover, it is not entirely clear what effect the pool will have on the occupancy rate. Therefore, since it is very likely the hotel can maintain 2% occupancy rates during the off-season, and likely much more than that, this is the best and most profitable choice. 7. Evaluate the profitability of the Hotel as an investment for its owners. Does this affect your answer to question 6? The profit margin of the hotel (profit as a percent of sales) is $11k/160k = 7%. However, if they decide to open the hotel for the summer they would need to reach 24% occupancy in order to reach the same absolute profits of about $11k and their profit margin would drop to 6%. The only way they can maintain profit margins of 7 to 7.5% would be to get occupancy during the off-season of 30%, which is definitely not a sure thing. One option would be to try opening the hotel for the off-season for one-year and testing what occupancy rates they can expect. If they are lower than they need, they could always decide not to open the hotel during the off-season in the future. This option does not exist for the pool options. Once they decide to build a pool they will have incurred a major capital expenditure and will likely need to support this investment over time in order to please their clientele who might have gotten used to having a pool. Therefore, while the business is quite profitable as is, I would still choose to open the hotel in the summer months.