Question

Empire Plaza Hotel is a luxury hotel with 432 rooms. Its regular room rate is $460 per night per room. The hotel's cost is $245 per night per room and consists of the following. Variable direct labor and materials cost Fixed cost Total cost per night per room $ 104 141 $ 245 The hotel manager receives an offer to hold the Junior States of America (JSA) convention at the hotel in February, which is the hotel's low season with an occupancy rate of under 45%. JSA would reserve 100 rooms for four nights if the hotel could offer a 50% discount, or a rate of $230 per night. The hotel manager is inclined to reject the offer because the cost per room per night is $245. Should the offer from JSA should be accepted or rejected? What is the contribution margin from accepting the offer? Contribution margin analysis

Answer 1

Room rate per night	$230
Variable cost per night	$104
Contribution margin per night per suite	$126
Number of nights	4
Number of suites	100
Incremental profit (loss) [$126 X 4 X 100]	$50,400
Should the offer be accepted	Yes