Alka hotel

: SECTION 3 KAPLAN PUBLISHING 177 300 THE ALKA HOTEL (JUNE 2018) The Alka Hotel is situated in a major city close to many theatres and restaurants. The Alka Hotel has 25 double bedrooms and it charges guests $180 per room per night, regardless of single or double occupancy. The hotel’s variable cost is $60 per occupied room per night. The Alka Hotel is open for 365 days a year and has a 70% budgeted occupancy rate. Fixed costs are budgeted at $600,000 a year and accrue evenly throughout the year. During the first quarter (Q1) of the year the room occupancy rates are significantly below the levels expected at other times of the year with the Alka Hotel expecting to sell 900 occupied room nights during Q1. Options to improve profitability are being considered, including closing the hotel for the duration of Q1 or adopting one of two possible projects as follows: Project 1 – Theatre package For Q1 only the Alka Hotel management would offer guests a ‘theatre package’. Couples who pay for two consecutive nights at a special rate of $67.50 per room night will also receive a pair of theatre tickets for a payment of $100. The theatre tickets are very good value and are the result of long negotiation between the Alka Hotel management and the local theatre. The theatre tickets cost the Alka Hotel $95 a pair. The Alka Hotel’s fixed costs specific to this project (marketing and administration) are budgeted at $20,000. The hotel’s management believes that the ‘theatre package’ will have no effect on their usual Q1 customers, who are all business travellers and who have no interest in theatre tickets, but will still require their usual rooms. Project 2 – Restaurant There is scope to extend the Alka Hotel and create enough space to operate a restaurant for the benefit of its guests. The annual costs, revenues and volumes for the combined a) Using the current annual budgeted figures, and ignoring the two proposed projects, calculate the breakeven number of occupied room nights and the margin of safety as a percentage. ? (4 marks) (b) Ignoring the two proposed projects, calculate the budgeted profit or loss for Q1 and explain whether the hotel should close for the duration of Q1. ? (4 marks) (c) Calculate the breakeven point in sales value of Project 1 and explain whether the hotel should adopt the project. ? (4 marks) (d) Using the graph, quantify and comment upon the financial effect of Project 2 on the Alka Hotel. ? Note: There are up to four marks available for calculations. (8 marks) (Total: 20 marks) This is the question. ) Breakeven point (in occupied room nights) = Fixed cost/contribution per room $600,000/($180 – $60) = 5,000 occupied room nights Margin of safety = (Budgeted room occupancy – breakeven room occupancy)/ budgeted room occupancy Total rooms available per annum: 365 days × 25 rooms = 9,125 rooms Budgeted occupancy level: 9,125 × 70% = 6,387.5 rooms Margin of safety: (6,387.5 – 5,000)/6,387.5 = 21.72% (b) Profit or loss for Q1 $ Contribution (900 rooms × $120) 108,000 Fixed costs (($600,000/12) × 3) (150,000) –––––––– Loss (42,000) –––––––– The Alka Hotel should not close in Q1. The fixed costs will still be incurred and closure would result in lost contribution of $108,000. This in turn would result in a decrease in annual profits of $108,000. In addition, the hotel could lose customers at other times of the year, particularly their regular business customers, who may perceive the hotel as being unreliable. And this is the answer.. My doubt is that in requirement b answer when we calcultaing contribution How did that 120 came?