Question

The Sayonara Hotel has 200 double bedrooms and is in the centre of a major middle eastern city. Fixed costs for the rooms division department are £4,368,000 per year, and the variable costs are £6 per person per night The hotel sells 54,750 guest-nights per year at £140 for a double room. A tour operator has approached you to see if you can sell them 20 rooms a week all year round at £50 a room. This will require you to take on some more housekeeping staff which will increase costs by £280 a week. What would your response be? Explain your answer and be sure to include both financial and non-financial reasons.

Answer 1

Answer is given below with working

Evaluation of special offer Guest Nights 1,040 Incremental Sales Variable cost Contribution Incremental Labor cost Net Profit £52,000 £12,480 £39,520 £14,560 £24,960 Since there is incremental profit the offer should be accepted Financial factors - incremental contribution - Recovery of fixed cost - Better capacity utilisation Non-financial factor - Demand spike during holidays - Loss of contribution during additional demand days - Capacity constraints during peak times Working note Total Capacity Break even point Additional capacity 73,000 34,125 38,875 Additional capacity is available and no existing sales loss Selling price variable cost Contribution £140 £12 £128 Fixed Cost £4,368,000 34,125 guest nights Break even point Fixed cost Contribution per room