Question

Hannah Turnbull manages Elegant Suites, a hotel in a small town 10 miles inland from Florida’s
beautiful gulf coast. Elegant Suites has a capacity of 320 suites and offers a small, but well
managed, conference center. Since opening, Elegant Suites has established a good reputation
among small and medium-sized business clients as a nice place to hold annual meetings and
retreats.
Hannah currently is in a quandary regarding hotel bookings for the last weekend in February.
One of Elegant’s long-standing clients, Piedmont Publishing, recently called Hannah about the
possibility of holding its annual three-day sales conference at the end of February. Piedmont
wants to reserve 75 rooms each day (= 225 total room days). Per its usual arrangement, Piedmont
would pay $120 per day per room and $5,000 per day for use of the convention center. Because
this is a bulk booking, the room rate is lower than the normal rate of $150 per day. Like all
clients, however, the Piedmont attendees would spend additional money at the hotel. Hannah
expects this miscellaneous expenditure to be $25 per person per day.
Shortly after receiving the call from Piedmont, Hannah received a call from Capelli Fashion
Designers. Capelli, a prospective first-time client, wants to hold its annual three-day fashion
event at Elegant Suites at the end of February. Capelli would book 225 suites per day (for a total
of 675 room days) and is willing to pay $120 per suite per day. Also, Capelli would be willing to
pay the normal daily rate of $5,000 for use of the convention center, although it wants Hannah to
construct a runway at a cost of $3,000. Hannah was ecstatic to receive the Capelli call until she
realized that the dates Capelli wants coincide with Piedmont’s annual sales meeting.
Trying to figure a way out, Hannah calls both Capelli and Piedmont to see if either party would
be willing to move its event to different dates. However, both Capelli and Piedmont are
committed to holding their respective events at the end of February. Next, Hannah looks at her
reservations chart to see if she can hold both events. She realizes that 60 suites already are
committed to other individual clients during that time. Hannah believes strongly that she must
honor these reservations.
Hannah provides you with the following summary financial data for a typical month of
operations.
Summary Financial Data for a Typical Month of Operations
Number of occupied suite-days (approx. 60%
occupancy) 6,000
Average Suite rate $130
Revenues:
Suites $780,000
Convention Center 75,000
Food, telephone, movies, and other incidentals 150,000
Total Revenues $1,005,000
Variable costs:
Food, laundry, supplies, telephone, and movies $180,000
Labor (kitchen help, cleaning staff) 210,000
Contribution margin $615,000
Fixed costs:
Labor (hotel management) $125,000
Building and Grounds 350,000
Profit before taxes $140,000
Hannah also informs you that if she stays with Piedmont, she is likely to sell another 57 suites to
individual parties for each of the three days at the standard rate of $150 per suite. If she accepts
Capelli, she will be able to sell the remaining 35 suites to individual parties for each of the three
days at the standard rate of $150 per suite. However, as booking Capelli would cause an
abnormally high occupancy rate (100%), Hannah anticipates the need to pay her hourly staff an
overtime premium of 50% for the three-day period (i.e., the average hourly wage will be the base
wage u 1.50).
Required
a. Identify Hannah’s decision options.
b. Identify Hanna’s best option.
c. Suppose 75 and 225 suites per day is the number of suites that Piedmont and Capelli wish to
block for their conventions. However, the actual demand might be less than this estimate.
While Piedmont is sure to occupy at least 60 suites, Capelli estimates that total demand might
range from 150 to 225 suites. Because actual demand would not be known till late, Hannah
would not be able to fill unused suites with paying guests. How might this information affect
Hannah’s decision?
d. Considering long-term implications, what should Hannah do?  

Answer 1

Option 1 - Booking with Piedmont

Revenue = 225 room days x120 + 57x3x150 + 3x5000 + 25 per person per day

= 67650+75 per person

Option 2 - Booing with Capelli

Revenue = 675x120+3x5000+35x150-3000 - Increase in overtime wages

Overtime wages = 125000+210000 /28 x 0.5 per day

=335000x0.5 /28 = 5982

for 3 days, overtime will be 5982x3 = 17946

Revenue in case 2 = 80904

if it is assumed that Capelli party members will not spend anything during the stay, both options will be equally feasible after certain members accompanying Piedmont.

Number n = 80904-67650/75 = 177

If there are 177 or more accompaying persons, the piedmont will be a better option. For anything less, Capelli is more beneficial.

c. We assume that the other parties expected to arrive along with the companies will remain the same.

Piedmont case - In worst case. there will be 75-60 =15 rooms unoccupied leading to potential loss of 120x15x3 =5400

Capelli case - In worst case there will be 225-150 =75 rooms unoccupied, leading to the loss of 75x120x3 =27000, but at the same time, the resort will be saving around 17946 in the overtime costs, leading to net loss of around 9000.

Additionally, 15 rooms in case I will be easier to fll than 75 in the second case. Thus, option 1 is more suitable in wake of uncertainty.

d. Hannah should go with decision 1 ( booking with Piedmont) as it is less risky preposition. However, decision must be taken on inputs based on past relationships with both companies and factors like average booking size, revenue earned per booking, frequency of booking and future potential with both companies. If these factors tilt heavily in favour of Capelli, there is no harm in bearing a loss of few thousand dollars keeping in mind the future potential of relationship.