Disney Hotel’s business district hotel and Disney Conventions are both profit centres. Both are owned by Disney Hotel Inc. Disney Conventions runs large trade-show conventions and rents conference rooms from hotels like Disney and other hotel chains. The business district hotel also rents conference rooms to other companies outside of the Disney Hotel Inc family of companies.
The business district hotel has 20 large conference rooms, and rents conference rooms for the current market rate of $5,000/weekend. Currently, 16 of the conference rooms have been booked for this weekend. It costs the hotel $800/weekend to maintain a conference room that is used for a conference, based on depreciation costs, maintenance costs, and cleaning costs. Depreciation is straight line depreciated over 40 years and costs $500 per weekend. 

1. Maintenance costs are a function of usage:
2.  if a conference is not used, then there are no costs; and if a conference room is used then costs will be incurred. 

Maintenance costs $100 per weekend. Cleaning costs are a total of $200 per weekend if a room is rented. Half of these cleaning costs are fixed, and the other half are variable.

Required - Each of these are separate situations:

1. The hotel has been approached by Disney Conventions to rent an additional conference room for this weekend. What is the likely minimum transfer price that the hotel will rent the additional conference room and the maximum transfer price that Disney Conventions will pay?

2. The hotel has been approached by Disney Hotel Conventions to purchase a block of 10 conference rooms for this weekend. What are the likely minimum transfer price and maximum transfer price per conference room?

Answer rating: 100% (QA)

SOLUTION 1 The likely minimum transfer price that the hotel will rent the additional conference room to Disney Conventions is the variable cost of mai... View the full answer