Question

Bill O'Leary is the General Manager of the 500-unit Plazamar Hotel. Elizabeth, as of the Director of Sales and Marketing, had worked hard to secure a chance to bid on the annual meeting of the State Dental Association. While the Plazamar's regular ADR is $150 per night, Elizabeth wanted to bid the rooms for the dental meeting (350 rooms for three nights) at $99 per night. At that proposed rate, she was convinced that the hotel would win the the bid. And if only 150 rooms remained to be sold on those three nights, the hotel could eliminate all discounts on its remaining rooms and thus maximize its RevPAR. At a bid rate higher than $99 per night, she warned that the State Dental Association would likely elect to go to the Altoona Hotel, the Plazamar's biggest competitor. "Let them have dentists," said Tony Baltimore, the hotel's front office manager. "The Altoona only has 400 rooms. If they sell out, we'll take their overflow. With our normal 65% occupancy and all of their overflow, we'll sell out anyway. And we can get $150 per night or more for all 500 of our rooms. That's how you maximize RevPAR." Assume you are Bill, the General Manager. which argument makes the most sense to you and why?

Answer 1

Computation of RevPAR of Plazamar Hotel based on Current ADR & Occuoancy

Given Value

ADR = $ 150

Occupancy = 65%

RevPAR = ADR * Occupancy

=> $150 * 65%

Current RevPAR = $ 97.50

If the bid for State Dental Association is made Plazamar will remove discounts on the remaining 150 rooms

Let us calculate the Average Room Rate in the current situation

Total Revenue as per Current ADR = Rooms sold * ADR

= 500 * $ 150

=$ 75,000

Occupancy Level = 500 * 65%

=325

Average Room Rate = Revenue / Rooms Occupied

=$ 75000/325

=$ 230.77

If the bid for State Dental Association is taken & discounts for the remaining rooms are removed,the revenue would be as under:

Rooms	Rate	Revenue
350	99.00	34,650.00
150	230.77	34,615.50
500		69,265.50

ADR = $ 69,265.50 / 500

=$ 138.53

Occupancy in this situation = 100%

RevPAR if the bid is made = ADR * Occupancy

= $ 138.53 *100%

=$ 138.53

Since by taking the bid RevPAR of Plazamar Hotel is increasing by approximately 40% from $ 97.50 to $ 138.53,the General Manager should make the bid at $ 99 per night for 350 rooms. The scenario stated by the Front Office Manager has many variables which cannot be controlled by Hotel Plazamar.

Answer - Hotel Plazamar should make the bid at $ 99 per night for 350 rooms