2.5 Assignment: Case Study - Pricing for a Hotel Forecasting

Goal

Demonstrate and explain how forecasts affect performance.

Description

Mary Ellen plans to start a small hotel, Mary Ellens Inn, on the outskirts of Saskatoon. She has had her public accountant prepare a projection (Exhibit 3.4) for the first year of business. The projection is based on the following assumptions:

Desired after-tax profit (net income) is 22% of the required investment of $500,000.

The income tax rate will be 13%.

Fixed expenses are expected to be:

Manager Salary		$45 000
Utilities		$25 000
Insurance		$15 000
Cleaning and maintenance		$24 000
Mortgage interest		$97 000
Loan interest		$30 000
Licenses		$5 000
Administrative salaries		$48 000
Equipment depreciation		$20 000
Building depreciation		$37 500
Marketing		$12 000
Professional fees		$10 000

Variable expenses for the rooms operation are expected to be:

Wages: 32%

Other: 7%

There will be a small restaurant in the hotel, but it will not be operated by the hotel. It will be leased to an operator at an annual rent of $24,000.

Various vending machines will be located throughout the building. They will not be owned or operated by the hotel. The owner/operator of the vending machines will pay a per-site fee of $1000, and projected to be $18,000 for the first year of business.

The hotel will have 28 rooms.

The hotel's first year of operation will begin on May 1, 2021, and end on April 30, 2022.

The hotel anticipates an occupancy rate of 72%.

Exhibit

Mary Ellens Inn

Projected (Contribution Margin format) Income Statement

for the year ended April 30, 2022

		I.T. %		#s		Var Exp %
Room Revenue				$742,520		1.00 ($452,937.61)
Variable Expenses
Wages				237,606		.32 ($742,520 .32)
Other				51,977		.07 ($742,520 .32)
Total Variable Expense				289,583		.39
Contribution margin				452,937		.61 (126,437 + $326,500)
Fixed Expenses
Restaurant lease				(24,000)
Vending Machine site fees				(18,000)
Managers Salary				45,000
Utilities				25,000
Insurance				15,000
Cleaning and maintenance				24,000
Mortgage Interest				97,000
Loan Interest				30,000
Licenses				5,000
Admin Salaries				48,000
Equipment depreciation				20,000
Building Depreciation				37,500
Other				12,000
Professional fees				10,000
Total Fixed Expenses				326,500
Pre-tax income		1.00		126,437
Income taxes		.13		16,437		($110,000.87)
Net Income		.87		$110,000		(.13 $126.437) (22% of $500,000)

Student Tasks and Answers

Task 1) Calculate the average room rate required to cover all forecast costs (including net income). Show all of your work. (3 marks)

Task 2) State some of the important considerations in pricing, such as an organizations objectives, the elasticity of demand, cost structure, and competition. (12 marks)