Question

The Holiday Inn Riverside is a popular destination for fans traveling to watch the local university football games, and sometimes for visiting teams as well. History has shown that when the hotel is fully booked, the number of last-minute cancellations (at no cost to the customer) has a mean of 15 and standard deviation of 4. The average room rate is $120 at the Holiday Inn. When the hotel is overbooked, the policy is to find a room in a nearby comparable hotel without overcharging the customer, and to pay the prevailing rate (typically $175) on behalf of the overbooked customer. Referring to the previous data for Holiday Inn Riverside: What is the underage cost of overbooking one too few rooms? Group of answer choices

a.$120
b.$175
c.$55
d.$25

Answer 1

The underage cost of overbooking one too few room at the Holiday Inn Riverside is the difference between the cost of accommodating a guest at a different hotel ($175) and the average rate at the Holiday Inn ($120), which equals $55.

Step-by-step explanation:

In this scenario, the underage cost is the cost incurred by the Holiday Inn Riverside when they book one too few rooms and have to accommodate a guest at another hotel. The underage cost in this case is the difference between the prevailing rate the hotel has to pay for the alternative accommodation and the average room rate at the Holiday Inn.

The Holiday Inn charges an average room rate of $120, and when overbooked, they have to pay a prevailing rate of $175 for a comparable hotel. Therefore, the underage cost of overbooking one too few room would be $175 (the rate paid for the guest at another hotel) minus $120 (the rate they would have received if the guest had stayed at the Holiday Inn).

The underage cost is $55 ($175 - $120 = $55). Therefore, the correct answer is c.$55.