The Thornton Hotel is an old, but well-maintained property. It is positioned as a mid-price, good quality
Question:
The Thornton Hotel is an old, but well-maintained property. It is positioned as a mid-price, good quality resort hotel.
The Thornton Hotel is open only during the skiing season. It opens on December 1 and closes the last day of March. The nearby ski mountain operates on a permit from the state which allows only 120 days of operation per year. Each of the 50 rooms in the East Wing rents for $15 for single occupancy or $20 for double occupancy. The West Wing of the hotel has 30 rooms, all of which have spectacular views of the skiing slopes, the mountains, and the village. Rooms in this wing rent for $20 and $25 for single and double occupancy, respectively. The average occupancy rate during the season is about 80% (typically, the Hotel is full on weekends and averages 50 to 60 rooms occupied on Saturday and Sunday nights). The ratio of single versus double occupancy is 2:8, on average.
Operating results for the last fiscal year are shown in Exhibit 1. Mr. Carmichael, the manager of the hotel, is concerned about the off-season months, which show losses each month and reduce the high profits reported during the season. He has suggested to the owners, who acquired this hotel only at the end of the 2010 season, that to reduce the off-season losses, they should agree to keep the West Wing of the hotel operating all year-round. He estimates the average occupancy rate for the off-season to be between 20% and 40% for the next few years. Carmichael estimates that with careful attention to the off-season clientele a 40% occupancy rate for the 30 rooms during the off-season would be much more likely if the owners would commit $4,000 for advertising each year ($500 per month for 8 months). There is no evidence to indicate that the 2:8 ratio of singles vs. doubles would be different during the remainder of the year or in the future. Rates, however, would have to be drastically reduced. Present plans are to reduce them to $10 and $15 for singles and doubles respectively.
The manager's salary is paid over 12 months. He acts as a caretaker of the facilities during the offseason and also contracts most of the repair and maintenance work during that time. Using the West Wing would not interfere with this work, but would cause an estimated additional $2,000 per year for repairs and maintenance.
Mrs Carmichael is paid $20 a day for supervising the maids and helping with check-in. During the season, she works 7 days a week. The regular desk clerk and each maid are paid on a daily basis at the rate of $24 and $15 respectively. The payroll taxes and other fringe benefits are about 20% of the payroll. Although depreciation and property taxes would not be affected by the decision to keep the West Wing open, insurance would increase by $500 for the year. During the off-season, it is estimated that Mr and Mrs Carmichael can handle the front desk without an additional person. Mrs Carmichael would, however, be paid for 5 days a week.
The cleaning supplies and half of the miscellaneous expenses (room supplies) are considered a direct function of the number of rooms occupied. The other half of the miscellaneous expenses are fixed and would not change with operating for the full year. Linen is rented from a supply house and the cost also depends on the number of rooms occupied, but is twice as much, on average, for double occupancy as for single occupancy. The utilities include two items: telephone and electricity.
There is no electricity expense when the hotel is closed. When the hotel is operating, electricity expense is a function of the number of rooms available to the public. Rooms must either be heated or air-conditioned. The telephone bills for each of the four seasonal months were as follows:
During the off-season, only the basic service charge is paid. The monthly charge of $3 is applicable only to active telephones.
An additional aspect of Mr. Carmichael's proposal is to add a heated and covered indoor swimming pool to the hotel. Mr. Carmichael believes that this would increase the probability that the off-season occupancy rate would be above 30%. Precise estimates are impossible. It is felt that although the winter occupancy rate will not be greatly affected by adding an indoor swimming pool, but eventually such a pool will have to be built to stay competitive. The cost of building such a pool is estimated to be $40,000. This amount could be depreciated over 5 years with no salvage value ($15,000 of the $40,000 is for a plastic bubble cover and the heating units, which would be used nine months of the year). The only other costs associated with the swimming pool are $400 per month for a lifeguard, required by law during the busy hours; additional insurance and taxes, estimated to be $1,200; heating cost of $1,000; and a yearly maintenance cost of $1,800. If the pool is covered, a lifeguard would be needed for 12 months. If it is not covered, a lifeguard would be needed only for 3 summer months (from 15 June to 15 September, the warmest period of the year), and there would be no heating expense.
Requirements
1) On average, how many rooms must be rented each night in season for the hotel to break even? [Hints: (a) treat one occupied room night as one unit produced; (b) three variable cost items need to be identified]
2) The hotel is full on weekends in the ski season. If all room rates were raised $5 on Saturday and Sunday nights, but occupancy fell to 72 rooms instead of 80, what is the revised profit before taxes for the year, per Exhibit 1?
3) What is the proposed incremental contribution margin per occupied room day during the offseason?
4) For each alternative shown below, calculate the annual expenses that are incremental to that decision alternative but are not related to the room/days occupied.
5. For each decision alternative, calculate the occupancy rate necessary to break even on the incremental costs.
Mathematical Applications for the Management Life and Social Sciences
ISBN: 978-1305108042
11th edition
Authors: Ronald J. Harshbarger, James J. Reynolds