Empire Plaza Hotel is a luxury hotel with 400 rooms. Its regular room rate is $300 per night per room. The hotel's cost is $165 per night per room and consists of the following.
Variable direct labor and materials cost . . . . . . . . . . . . . . . . . $ 40
Fixed cost [($18,250,000/400 rooms) 4 365 days] . . . . . . . . . 125
Total cost per night per room. . . . . . . . . . . . . . . . . . . . . . . . . $165
The hotel manager received an offer to hold the Junior States of America (JSA) convention at the hotel in February, which is the hotel's low season with an occupancy rate of under 45%. JSA would reserve 100 rooms for four nights if the hotel could offer a 50% discount, or a rate of $150 per night. The hotel manager is inclined to reject the offer because the cost per room per night is $165. The manager believes that if 100 rooms are offered at the rate of $150 per night for four nights, the hotel would lose $6,000, computed as ($150 2 $165) 3 100 rooms 3 4 nights.
Required
Prepare an analysis of this offer for the hotel manager. Explain (with supporting computations) whether the offer from JSA should be accepted or rejected.