Caesars Palace® Las Vegas made headlines when it undertook a $75 million renovation. In mid-September 2015, the hotel closed its then-named Roman Tower, which was last updated in 2001, and started a major renovation of the 567 rooms housed in that tower. On January 1, 2016, the newly renamed Julius Tower reopened, replacing the Roman Tower. In addition to renovating the existing rooms and suites in the former Roman Tower, 20 guest rooms were added to the Roman Tower. With the renovation completed,
Caesars expects the Julius Tower room rate to average around $149 per night. This increase, a $25 or 20.2% increase, reflects, in part, the room improvements.
Assume that the annual fixed operating costs for the Julius Tower in Caesars Palace® Las Vegas will be $5,000,000. This amount represents an increase of $200,000 per year compared to pre-renovation. Also assume that the variable cost per hotel room night after the renovation is $27; before the renovation, the variable cost per room night was $20. The average hotel occupancy rate, in 2014, for Caesars Entertainment Corporation was 91.2%, according to its 2014 Form 10-K. By comparison, the average hotel occupancy rate in Las Vegas overall, for that same time period, was 86.8%, according to Stastia.com.
Requirements
1. What cost types, associated with a hotel room in the Julius Tower, are variable with respect to hotel room occupancy? What cost types are fixed with respect to hotel room occupancy?
2. Before the renovation, how many hotel room nights were needed to break even in the original Roman Tower (now Julius Tower)? Using Caesars' occupancy rate, what was the margin of safety in units before the renovation? What is the margin of safety in units if the Las Vegas hotel occupancy rate is used instead of Caesars' occupancy rate?
3. After the renovation, how many hotel room nights are needed to break even in the Julius Tower? Using Caesars' occupancy rate, what is the margin of safety in units after the renovation? What is the margin of safety in units if the Las Vegas hotel occupancy rate is used instead of Caesars' occupancy rate? Which hotel occupancy rate estimate is more appropriate in this case? Why?