Crabbe, the owner of the Ocean Hotel, is concerned about the hotel’s finances and has asked your advice. He gives you the following information:
We have rooms for 80 guests. When the hotel is open, whatever the level of business, we have to meet the following each month:
Staff wages and benefits 12 500
General overheads (rates, electricity, etc) 8 000
Depreciation 2 200
Interest on mortgage end bank loan 1 800
Repayments on mortgage and bank loan 2 500
Drawings for my own needs 1 000
total 28 000
‘For our normal business we charge an average of £20 per night for each guest. Each guest-night involves variable costs of £4 for laundry and cleaning. Guests also spend money in the restaurant, which on average brings us another £5 per guest-night after meeting variable costs.
‘I need advice concerning the month of September. Normal business in September will depend on weather conditions, and the probabilities of occupancy from normal business are:
For month of September
Weather condition A B C
Probability 0.3 0.4 0.3
Occupancy (total guest-nights) 1440 1680 1920
‘Airtravel Tours has enquired about a block booking at a discount in September. I intend to quote a discount of 40 per cent on our normal guest-night charge. In the restaurant Airtravel’s package tourists will only bring us £3 per guest-night after variable costs. Airtravel coud take all our capacity, but I have to decide how many guest-nights to offer. The contract will mean that I agree in advance to take the same number of Airtravel tourists every night throughout September. If they won’t accept my price, I would be prepared to go as far as a 60 per cent discount.
a. Calculate the number of guest-nights Crabbe should contract to Airtravel Tours at the quoted 40 per cent discount, using the expected value as the basis for the decision. (9 marks)
b. Determine the minimum price per guest-night at which it would be worthwhile for Crabbe to do business with Airtravel, and the maximum number of guess-nights it would be worthwhile to contract at this price. (3 marks)
c. Explain the criteria on which you have used to identify costs and to assess Crabbe’s business options in requirements (a) and (b) above, and comment on how the assessment could be improved. (8 marks)
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