Question

In: Accounting

Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years....

Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years. Due to a hotel owner's illness, Amy was offered the opportunity to purchase a hotel near a seaside vacation area she had often visited. After obtaining a lawyer and a financial accountant to assist her, Amy did an analysis of the most recent financial statements of the hotel. Since the hotel had consistently shown a profit during the past few years, Amy thought that the price of the hotel was reasonable, so she decided to purchase the hotel. She resigned her position, obtained a loan, and purchased the hotel.

During the first year as a hotel manager, Amy received an offer from a tour operator who proposed to guarantee a considerable number of room reservations, including during the off-season. However, she turned down the offer because the tour operator asked for a 20% price reduction compared to the regular room rate. A few weeks later, she decided to shut down the restaurant, located in the main building of the hotel, in order to save expenses. With regard to general expenses, she was particularly concerned with the high room cleaning and service costs. On the sales side, although the reservations for the cheaper standard rooms were a bit sluggish, the more expensive large-size superior rooms had a very good occupancy rate of over 90%.

The following year, there was a severe economic downturn and also a very bad weather season that reduced the number of guests and also caused a resulting mold situation in the hotel building that required expensive repair work. Amy ran short of cash, became emotionally distraught, and eventually had to sell the hotel at a significant loss.

Prepare a cash budget for the first four quarters after Amy’s purchase of the hotel with any data you can imagine or find on the internet. To answer the question, invent some basic cost and revenue data. Enter the numbers directly in the table below. The table of the cash budget itself should not exceed 15-20 lines. In addition to that, make sure to explain your underlying assumptions and comment on the results in the space provided below the table.

  • calculation of cash receipts, including assumptions and comments;
  • calculation of cash disbursements, including assumptions and comments;
  • for overall coherence / form, and overall conclusions/comments

Cash Budget for the first four quarters:

Cash Item

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Add additional lines as needed.

Solutions

Expert Solution

BASIC ASSUMPTIONS

  1. There are only 2 types of rooms in the hotel : standard rooms and superior rooms.
  2. Standard rooms are cheaper than large sized superior rooms.
  3. The restuarant incurs a fixed cost even when it is not in use. Let us assume it to be $1,700 per seat. (The Opportunity Cost of using the restaurant for other purposes is ignored.)
  4. There are 500 standard rooms with a rate of  $180 per night and 300 superior rooms costing $220 per night.
  5. The past financial records show that on an average the hotel makes $40,000 and $60,000 per year.

CALCULATED CASH BUDGET FOR THE YEAR

  • 90% of the superior rooms were occupied during the year = 90% of 300 *220

= $59,400

  • Standard rooms showed sluggish sales = (90%/5) of 500 *180

= $ 16,200

  • Fixed charges of restaurant that is closed down = $1,700 * 75 seats

= $ 127,500

  • General administration expenses = $ 5000

Therefore the total amount = $59,400 + $ 16,200 - $ 127,500 - $ 5000

= loss of $56,900

INFERENCE

As the results clearly show, the closing of the restaurant have resulted in a major loss for the hotel business. If that was avoided, then the firm might have ended in a profit.

The other decision; rejecting the offer of a tour operator did not cause much of a loss to the company. It is true that the sale of standard rooms became sluggish afterwards, but that might not have been predicted at the time when the rejection decision was taken. Another probable reason might be the past years financial statements that gave Amy, the new owner, the confidence to reject the offer, expecting more sales that what had actually occured. This shows the dynamicity of the markets.


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