SkyView Manor

Skyview  Manor       1.  On  average,  how  many  rooms  must  be  rented  each  night  in  season  for  the  hotel  to  breakeven?  

 

About  51  rooms  must  be  rented  each  night  during  the  peak  season  for  the  hotel  to  breakeven.     Break-­‐even  number  of  rooms  each  night     total  sales   Fixed  costs   Variable  costs  per  room:     Contribution  margin   CM  Ratio   Break-­‐even  in  dollars   Break-­‐even  ($/day)   Break-­‐even  rev  from  dbl/day   Number  of  doubles  /day   Break  even  rev  from  sgl/day   Number  of  singles/day   total  number  of  rooms  

    160800    $                    77,973      $                    60,437      $                100,363     62%    $    124,927.10      $            1,041.06      $                    832.85      $                                    38      $                    208.21     12   50.63  

  rooms      East  Wing   West  Wing   Total  Rooms  available   Avg  Occupancy  winter   Winter  days   Manager  annual  salary   Manager  wife/day   Desk  clerk/day   Maid/day   Maids  peak   Payroll  Taxes/Fringe  Benefits   Depreciation   Property  Taxes     Insurance  (Just  Winter)   Repairs  and  Maintenance  (Just  winter)   #  Rooms  Rented  in  Winter  at  80%  Occupancy   Cleaning  Supplies/room   Miscellaneous  Fixed   Miscellaneous  variable   Linen  (just  winter)   Linen  /double  room   Linen/single  room   Rooms  rented   telephones/room/month   telephones:  basic  charge/month   Telephones  (just  winter)   Electricity/  available  room  (just  winter)   Interest  on  Mortgage   Rooms    

Double  rate  

dbl  rate   50   30   80  

  120    $      15,000     20   24   15   4   20%    $      30,000      $          4,000      $          3,000      $      17,204     7680    $                0.25      $          3,657      $          3,657      $      13,920      $                1.51      $                0.76    

      fixed   variable   variable   variable       fixed   fixed   partially  variable   partially  variable        

          3    variable   50   fixed   1160    variable    $                      65      $      21,716     fixed   Dbl  Rev  

sgle  rate   20   15   25   20  

single  rate  

                                                  Single   Rev  

East  Wing   West  Wing   Total  rooms  available     Average  Occupancy  Rate   Average  Rate   Avg  Revenue/Day    

50   30   80   80%        

20   25  

640   480  

80%     21.75      

15   20    

1120  

 

20%     16.875      

120   96  

216  

 

  2.  The  hotel  is  full  on  weekends  in  the  ski  season.  If  all  room  rates  were  raised  $5  on  weekend  nights,  but   occupancy  fell  to  72  rooms  instead  of  80,  what  is  the  revised  profit  before  taxes  for  the  year,  per  Exhibit  1?     If  room  rates  were  raised  by  $5  on  weekend  nights  and  occupancy  fell,  the  revised  profit  before  taxes  would  be   $24,982.     Revenue   Expenses  

 $    162,681.30      Salaries  

 Manager     Manager's  Wife         Desk  Clerk         Maids               Payroll   Taxes         Depreciation         Property  Taxes       Insurance  (Just  winter)       Repairs  (just  winter)       Cleaning  Supplies       Utilities       Linen  Service         Interest         Misc.  Expenses    Total  Expenses         Profit  before  Taxes     Income  Taxes         Net   Profit          

                                       

   $    15,000      $        2,400      $        2,880      $        7,200      $    27,480      $        5,496      $    30,000      $        4,000      $        3,000      $    17,204      $        1,850      $        6,360      $    13,412      $    21,716      $        7,181            

  Weekend  nights  in  winter  

35  

Weekday  nights  in  winter    

85     90%    

Weekend  occupancy  at  regular  rates   weekday  occupancy  at  regular  rates     Average  Occupancy   Average  rate  weekday   average  rate  weekend   Weekend  total  rooms   Weekday  total  rooms  

69%     80%      $                        20.78        $                        25.88       2520     4692      

                   x      x      x      x      $                137,699      $                    24,982      $                    11,992      $                    12,991    

Weekday  revenue  

 $        97,476.30    

weekend  revenue  

 $        65,205.00        $    162,681.30      

Total  Revenue  

   Winter  days   Manager  annual  salary  

 

120      $                    15,000      fixed  

Manager  wife/day  

20   variable  

Desk  clerk/day  

24   variable  

Maid/day  

15   variable  

Maids  peak  

4  

Depreciation  

20%      $                    30,000      fixed  

Property  Taxes    

 $                        4,000     fixed  

Insurance  (Just  Winter)  

 $                        3,000     partially  variable  

Repairs  and  Maintenance  (Just  winter)  

 $                    17,204     partially  variable  

Payroll  Taxes/Fringe  Benefits  

#  Rooms  Rented  in  Winter  at  80%  Occupancy  

7680  

Miscellaneous  Fixed  

 $                              0.25        $                        3,657          

Miscellaneous  variable  

 $                        3,657    

Linen  (just  winter)  

 $                    13,920        $                              1.51      

Cleaning  Supplies/room  

Linen  /double  room   Linen/single  room   Rooms  rented  

 $                              0.76       7212     3    variable  

telephones/room/month   telephones:  basic  charge/month  

50   fixed  

Telephones  (just  winter)  

1160  

Electricity/  available  room  (just  winter)  

 $                                    65      variable  

Interest  on  Mortgage  

 $                    21,716     fixed  

    3.  What  is  the  proposed  incremental  contribution  margin  per  occupied  room/day  during  the  off-­‐season?       Here  we  are  trying  to  determine  how  much  incremental  contribution  to  the  profit  per  occupied  room/day  during   the  off-­‐season.  Contribution  margin  is  determined  as  follows:  Sales  –  COGS  –  variable  operating  expenses.  The   average  revenue  per  occupied  room/day  is  $14.    

 

    4.   For   each   alternative   in   the   case,   list   the   annual   expenses   that   are   incremental   to   that   decision   alternative   but   are  not  related  to  the  room/days  occupied?    

5.  For  each  decision  alternative  calculate  the  occupancy  rate  necessary  to  break  even  on  the  incremental  annual   expenses.     6.  What  alternative  do  you  recommend?  Why?       I  recommend  opening  the  west  wing  year  round  as  only  a  2%  occupancy  rate  would  justify  doing  this.    I  would   hold   off   on   building   the   pool   as   it   is   a   major   capital   expenditure   and   makes   it   much   riskier   that   it   will   breakeven   on   the   investment.     Moreover,   it   is   not   entirely   clear   what   effect   the   pool   will   have   on   the   occupancy   rate.     Therefore,   since   it   is   very   likely   the   hotel   can   maintain   2%   occupancy   rates   during   the   off-­‐season,   and   likely   much  more  than  that,  this  is  the  best  and  most  profitable  choice.           7.   Evaluate   the   profitability   of   the   Hotel   as   an   investment   for   its   owners.   Does   this   affect   your   answer   to   question  6?       The  profit  margin  of  the  hotel  (profit  as  a  percent  of  sales)  is  $11k/160k  =  7%.    However,  if  they  decide  to  open   the  hotel  for  the  summer  they  would  need  to  reach  24%  occupancy  in  order  to  reach  the  same  absolute  profits   of   about   $11k   and   their   profit   margin   would   drop   to   6%.     The   only   way   they   can   maintain   profit   margins   of   7   to   7.5%  would  be  to  get  occupancy  during  the  off-­‐season  of  30%,  which  is  definitely  not  a  sure  thing.       One  option  would  be  to  try  opening  the  hotel  for  the  off-­‐season  for  one-­‐year  and  testing  what  occupancy  rates   they  can  expect.    If  they  are  lower  than  they  need,  they  could  always  decide  not  to  open  the  hotel  during  the   off-­‐season  in  the  future.    This  option  does  not  exist  for  the  “pool”  options.    Once  they  decide  to  build  a  pool  they   will   have   incurred   a   major   capital   expenditure   and   will   likely   need   to   support   this   investment   over   time   in   order   to  please  their  clientele  who  might  have  gotten  used  to  having  a  pool.       Therefore,   while   the   business   is   quite   profitable   as   is,   I   would   still   choose   to   open   the   hotel   in   the   summer   months.