Paris Airbed & Breakfast (PAB) provides accommodation house unit (HU) options for travelers seeking a comfortable stay. PAB caters to two main customer segments: short-term rentals and long-term rentals. On a weekly basis, PAB typically engages in an average of 200 long-term rental and 140 short-term rental agreements. The short-term segment rents for an average of 1.2 week, and the long-term segments rents for an average of 2 weeks. Nevertheless, it is worth noting that certain long-term rental contracts can be shortened to transition into short-term rentals. Drawing from previous experiences, about 20% of long-term rental customers opt to amend their arrangements and shift to shorter-term rentals. PAB outsources the maintenance of the HUs it rents to an external service provider. Accordingly, PAB must make an upfront one-time payment to the external service provider to cover maintenance costs (including utility expenses such as water and electricity, and other miscellaneous expenses) before renting the HUs to customers. The upfront one-time payment is $80 for long-term rental and $40 for short-term rental. 

Upfront one-time payments are non-refundable and non-transferable. Therefore, for example, if long-term rental customers change their minds and switch to short-term rentals, PAB cannot reclaim the payment difference, resulting in a loss for the company (i.e., they cannot recover the upfront payment difference of $40, that is, $80 - $40 = $40). Short-term renters pay $300 per week, while long-term renters pay $250 per week. HUs returned at the end of the rental period may sometimes pose significant hygiene issues. In such cases, they undergo an overall disinfection and sanitation (DS) process, followed by a simple cleaning process before being available for rent again. HUs without severe hygiene problems undergo only the simple cleaning process before being rented out again. It has been noted that 15% of the HUs returned by consumers display hygiene issues, requiring DS/simple cleaning processes before they can be made available for rent. On the other hand, 85% of the HUs returned by consumers show no hygiene issues, necessitating a simple cleaning process before they can be re-rented. However, 80% of the returned HUs fall into this category (no hygiene issues), with 5% being misclassified. The accurate determination can be made after the completion of the simple cleaning process. Consequently, 5% must undergo the DS/simple cleaning process once the simple cleaning process is complete, leading to unnecessary double simple cleaning. The flow time for both simple cleaning and DS includes activity time and rework time (T=activity time + rework time), and it is known that the visit of simple cleaning process is 1.5 and the visit of DS process is 1.2. On average, simple cleaning process spends an activity time of 0.6 weeks and incur a cost of $60 per HU. On average, there are 40 HUs going through the DS process. The cost of DS process is $90 per HU. Assume that HUs are rented as soon as they are available for rent. Assume that each HU loses $20 in value per week because of depreciation.

(a) Evaluate 

Weekly Profit=Total Revenue– Simple Cleaning and Disinfection and Sanitation Cost – Upfront one-time payment – Depreciation Cost

(b) Evaluate the following two options and choose the optimal option (assuming their investment costs are identical)

Option 1. The company negotiates with the external service provider and secures the upfront payment difference of $80 - $40 = $40.

Option 2. Reduce the visit of DS process from 1.2 to 1.0.

Answer rating: 100% (QA)

Lets break down the calculations and evaluate the two options Given information Average number of longterm rentals per week L 200 Average number of shortterm rentals per week S 140 Shortterm rental du... View the full answer