Grand Garden is a luxury hotel with 160 suites. Its regular suite rate is $210 per night per suite. The hotel’s cost per night is $135 per suite and consists of the following.
| Variable direct labor and materials cost | $ | 33 | |
| Fixed cost [($5,970,000/160 suites) ÷ 365 days] | 102 | ||
| Total cost per night per suite | $ | 135 | |
The hotel manager received an offer to hold the local Bikers’ Club annual meeting at the hotel in March, which is the hotel’s low season with an occupancy rate of under 50%. The Bikers’ Club would reserve 45 suites for three nights if the hotel could offer a 50% discount, or a rate of $105 per night. The hotel manager is inclined to reject the offer because the cost per suite per night is $135.
Required:
Prepare an analysis of this offer for the hotel manager.
Explanation
Revenue (45 suites × 3 nights × $105 per night) = $14,175
Variable costs (45 suites × 3 nights × $33 per night) = $4,455
As long as there are no additional fixed costs (additional staff that must be hired to see to the extra customers, for instance), and as long as no customers who would otherwise pay the full $210 per night are turned away, the hotel will realize a $9,720 increase in profits.
Variable costs (45 suites × 3 nights × $33 per night) = $4,455
As long as there are no additional fixed costs (additional staff that must be hired to see to the extra customers, for instance), and as long as no customers who would otherwise pay the full $210 per night are turned away, the hotel will realize a $9,720 increase in profits.
Thank you!
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