Question

Sand and Sea Resort (SSR) is a popular hotel with 400 rooms. SSR's regular room rate is $300 per night per room. SSR's cost is $165 per night per room. Below is a breakdown of the SSR's cost: Variable direct labor and materials cost Fixed cost Total cost per night per room $ 165 SSR manager receives an offer to hold the Innovative Scientist Conference at the hotel in March, which is the hotel's low season with an occupancy rate of under 30%. Innovative Scientist wishes to reserve 100 rooms for four nights if provided with a 50% discount, or a rate of $150 per night. The manager of the hotel is thinking about rejecting the offer because the cost per room per night is $165. Should the offer from Innovative Scientist be accepted or rejected? What is the contribution margin from accepting the offer? Contribution margin analysis

Answer 1

Contribution Margin Analysis
Number of rooms	100
Number of nights	4
Number of room nights	400
Room rent per night	$150
Total revenue	$60,000
Total variable expense (400 x 40)	-16,000
Total contribution margin	$44,000

Offer from Innovative scientist should be accepted since it will provide Contribution margin of $44,000.

Fixed cost is not relevant here since it will not increase by accepting Innovative scientist offer.

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