QUANTITATIVE FRAMEWORK $-$ PRACTICE #$1$

Given the Following Hotel:

A $500$ room hotel

Has an ADR of $$175/$room

The marginal cost of an occupied room is $$12/$room night

Runs at about $60\%$ occupancy over the year

The fixed costs of the hotel run at about $$250,000$ per year

You are asked whether you think this hotel is making money or not.

Preparation:

$1.$ What do you need to know to understand this situation?

$2.$ What measurements will help you assess the question? $[$Reverse: What measurements will not help you?$]$

$3.$How can you get the measurements$/$information that you need?

a$.$What systems; which people record or keep track of that information?

b$.$Are there good approximations for those measures that you can't definitively obtain?

$4.$What calculations would you need to perform?

Step $1-$ Prepare the baseline model of the Hotel:

Example $1-$ Market to increase demand

Your sales team recommends implementing a $$40,000$ marketing ad campaign to target a convention$/$group market $-$ the sales team estimates that the market segment can guarantee $125$ rooms a night at an $$85$ ADR.

NOTE: What information would you need to help you better evaluate how much this proposal will make?

Example $2-$ Lower rate to increase occupancy

Sales suggests that if you lower the ADR to $$150/$room$,$ they think they can reach $80\%$ occupancy. Is this idea worth it compared to the baseline performance of the hotel? At what ADR and occupancy combination would the idea be profitable? In the long run, how might lowering ADR and increasing occupancy affect the various 'Operating Costs' of the hotel?