Question

Hotel Fawlty Towers is (as expected) not doing so well. In total, there are fixed joint costs of 4,800,000 (converted to SEK) per year. On average, you have separate income (= sales price) of SEK 1200 per guest per night. The special cost for each guest and night is 180 SEK. In total, there are 3100 overnight guests per year but a capacity of 6500 per year. The worst is during the weekends where you only have 120 overnight guests per year (included in the 3100 guests per year). Now the hotel owner, Basil, has been on a course in Revenue Management and learned there that you should put a lower price on the weekends to fill the hotel better. Together with the regular guest and strategist Major Gowen, Basil estimates that if the price per guest and night is set to SEK 700, the number of overnight stays at weekends will increase to 350 per year and if the price is set to SEK 500, the number of overnight stays at weekends will be a total of 800 per year. The price during other days does not change, nor the number of guests.

SEK = Swedish kronor. Although hotels and people are taken from the English series "Pang in the building", we are based on Swedish conditions regarding VAT rate and currency.

a)Should you lower the price on weekends? If so to SEK 700 or SEK 500? Show total results for the different options and compare with not lowering the weekend price! (6p)

b) In order to obtain additional revenue, you plan to sell various small items at the reception. Basil has heard that the gross profit margin for these goods should be 60%. What then is the selling price of a toothbrush the hotel buys for 8,00 SEK? Don't forget to add VAT with a 25% surcharge!

Answer 1

Solution:

(a.) When we compare both options (SEK 700 and SEK 500) with current sale price

Decision: When we look into the above comparative analysis, we see that when we reduce the sale price to SEK 700 then we will have net loss equals to SEK 15,78,400 instead of a current net loss of SEK 16,38,000. It means the current loss will reduce by SEK 59,600. Hence the option to reduce the sale price to SEK 700 is beneficial for the hotel.

But when we reduce the sale price to SEK 500 then we will get a net loss of SEK 15,04,400 which is lower than current net loss SEK 16,38,000 by SEK 1,33,600. It means due to a change in the sale price to SEK 500 for weekends, we get benefit equals to SEK 1,33,600.

After the above analysis, it seems like that we have to reduce the sale price of weekends equals to SEK 500 because when we set sale price to SEK 500 we will get net loss reduced by SEK 1,33,600 which is more than when we set the sale price of weekends to SEK 700. The option of reducing weekends sale price to SEK 500 is better.

(b.) Computation of the Sale price of various items sold at reception

Working Note: Computation

Gross Profit Margin = (Sale Price - Cost) / Sale Price

0.60 = (Sale Price - SEK 800) / Sale Price

0.60 x Sale Price = Sale Price - SEK 800

Sale Price - 0.60 x Sale Price = SEK 800

0.40 x Sale Price = SEK 800

Sale Price = SEK 800 / 0.40

Sale Price = SEK 2,000