Winter Garden is a luxury hotel with 150 suites. Its regular suite rate is $250 per night per suite. The hotel’s cost per night is $140 per suite and consists of the following.
Variable direct labor and materials cost | $ 30 |
Fixed cost [($6,022,500/150 suites) 4 365 days] | 110 |
Total cost per night per suite | $140 |
The hotel manager received an offer to hold the local Bikers’ Club annual meeting at the hotel in March, which is the hotel’s low season with an occupancy rate of under 50%. The Bikers’ Club would reserve 50 suites for three nights if the hotel could offer a 50% discount, or a rate of $125 per night. The hotel manager is inclined to reject the offer because the cost per suite per night is $140. The manager believes that if 50 suites are offered at the rate of $125 per night for three nights, the hotel would lose $2,250, computed as ($125 – $140) – 50 suites × 3 nights.
Required
Prepare an analysis of this offer for the hotel manager. Explain (with supporting computations) whether the offer from the Bikers’ Club should be accepted or rejected.
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