Question

Grand Garden is a luxury hotel with 165 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 $ 36
Fixed cost [($5,970,000/165 suites) ÷ 365 days] 99
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 55%. The Bikers’ Club would reserve 45 suites for three nights if the hotel could offer a 55% discount, or a rate of $94 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.

Answer 1

The hotel manager should analyze the offer from the Bikers’ Club based on the hotel's cost per suite per night and the discounted rate offered. The hotel should compare the revenue generated from the Bikers’ Club reservation to the variable and fixed costs associated with each suite to determine if it is financially beneficial to accept the offer. The hotel should reject the offer from the Bikers’ Club because it would result in a loss.

Step-by-step explanation:

The hotel manager should analyze the offer from the Bikers’ Club based on the hotel's cost per suite per night and the discounted rate offered. The regular suite rate is $210 per night, while the cost per suite per night is $135. The Bikers’ Club is asking for a 55% discount, which would amount to $94 per night. The hotel manager should compare the revenue generated from the Bikers’ Club reservation to the variable and fixed costs associated with each suite to determine if it is financially beneficial to accept the offer.

To calculate the revenue generated from the Bikers’ Club reservation, multiply the discounted rate of $94 by the number of reserved suites (45) and the number of nights (3): $94 × 45 × 3 = $12,690. This revenue should then be compared to the variable and fixed costs of each suite. The variable cost per suite per night is $36, so the total variable cost for the reservation would be $36 × 45 × 3 = $4,860. Additionally, the fixed cost per night per suite is $99, so the total fixed cost for the reservation would be $99 × 45 × 3 = $13,365.

Comparing the revenue ($12,690) to the variable cost ($4,860) and fixed cost ($13,365) reveals that the hotel would incur a loss if it accepted the offer. Therefore, the hotel manager should reject the offer from the Bikers’ Club.

Answer 2

rental price per night $210

variable direct labor and materials $36

fixed costs $5,970,000

assuming 100% occupancy rate during the whole year, fixed cost per unit = $99 per night

total cost per night $135

assuming a 55% occupancy rate = 90.75 rooms per night

fixed costs are equal in both scenarios, so they are not relevant

alternative A alternative B differential

not rent rent to bikers amount

rental revenue $19,057.50 $23,310 ($4,252.50)

per day

variable costs -$3,267 -$4,887 $1,620

total per night $15,790.50 $18,423 ($2,632.50)

x 3 nights $47,371.50 $55,269 ($7,897.50)

By not renting the rooms to the Biker Club, the hotel will be losing $7,897.50 during the 3 nights.

The allocation of fixed costs per night assumes that all the hotel rooms are being rented every night and that is not true, so the total cost per night is not a valid amount. They should allocate fixed costs based on the average occupancy rates per month.