The Prince Hotel has 30 bedrooms and it charges guests at $200 per room per night. The hotel’s variable cost is $50 per room per night. Fixed costs are budgeted at $1,645 per night. In normal circumstances, 90% of the rooms are occupied by guests every night. Due to the pandemic, over the last month, no room has been occupied. Hence, the managers are considering closing the hotel with a $0 expected net income or taking one of the two possible projects as follows:

Project 1 – Family Day Package:

The hotel management could offer guests a ‘Family Package’, which includes two free tickets to an amusement park nearby for each night booked. As such, the hotel’s variable cost will increase to $120 per room per night. The hotel will charge guests at $210 per room per night. Fixed costs are expected to remain the same. The managers estimate that 50% of the rooms would be occupied by guests.

Project 2 – Cost Reduction Strategy:

The hotel management could reduce costs by implementing a strict cost control. In doing so, the variable cost will decrease to $40 per room per night. The hotel will still charge guests at $200 per room per night. Fixed costs are expected to decrease to $820 per night. The managers estimate that 30% of the rooms would be occupied by guests as the economy has started to show signs of recovery.

Required:

Calculate the expected profit (or loss) per night for both projects based on the estimated number of rooms occupied by the guests. (2 marks)

Answer here:

Profit (or Loss) per night if only Project 1 is taken:

Profit (or Loss) per night if only Project 2 is taken:

Required:

Based on your answers above, indicate to the management of Prince Hotel, which is the best option: Project 1, Project 2 or closing the hotel. (1 mark)

Answer here:

Answer rating: 100% (QA)

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