Question

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 12 properties with an average of 200 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 75 percent, based on a 365-day year. The average room rate was $175 for a night. The basic unit of operation is the “night,” which is one room occupied for one night.

The operating income for year 1 is as follows:

HomeSuites
Operating Income
Year 1
Sales revenue
Lodging	$	137,980,000
Food & beverage		13,797,000
Miscellaneous		7,884,000
Total revenues	$	159,661,000
Costs
Labor	$	38,976,000
Food & beverage		13,140,000
Miscellaneous		8,541,000
Management		2,501,000
Utilities, etc.		37,200,000
Depreciation		10,800,000
Marketing		15,000,000
Other costs		8,001,000
Total costs	$	134,159,000
Operating profit	$	25,502,000

In year 1, the average fixed labor cost was $401,000 per property. The remaining labor cost was variable with respect to the number of nights. Food and beverage cost and miscellaneous cost are all variable with respect to the number of nights. Utilities and depreciation are fixed for each property. The remaining costs (management, marketing, and other costs) are fixed for the firm.

At the beginning of year 2, HomeSuites will open four new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 75 percent. Management has made the following additional assumptions for year 2:

• The average room rate will increase by 8 percent.
• Food and beverage revenues per night are expected to decline by 15 percent with no change in the cost.
• The labor cost (both the fixed per property and variable portion) is not expected to change.
• The miscellaneous cost for the room is expected to increase by 20 percent, with no change in the miscellaneous revenues per room.
• Utilities and depreciation costs (per property) are forecast to remain unchanged.
• Management costs will increase by 6 percent, and marketing costs will increase by 8 percent.
• Other costs are not expected to change.

The managers of HomeSuites are considering different pricing strategies for year 2. Under the first strategy (“High Price”), they will work to maintain an average price of $212 per night. They realize that this will reduce demand and estimate that the occupancy rate will fall to 65.0 percent with this strategy. Under the alternative strategy (“High Occupancy”), they will work to increase the occupancy rate by lowering the average price. They estimate that with an average nightly rate of $172, they can achieve an occupancy rate of 85 percent. The current estimated profit is $16,159,340.

Required:

a. Prepare a budgeted income statement for year 2 if the “High Price” strategy is adopted. (Round your per unit average cost calculations to 2 decimal places.)

Answer 1

Budgeted Income Statement for Year 2 (High Price Strategy)

Particulars	Amount (in $)
SALES/ REVENUE
Lodging	160,950,400
Food & beverages	13,551,720
Miscellaneous	9,110,400
Total (A)	183,612,520
COSTS
Labor	45,894,400
Food & beverages	15,184,000
Miscellaneous	11,843,520
Management	2,651,060
Utilities, etc.	49,600,000
Depreciation	14,400,000
Marketing	16,200,000
Other Costs	8,001,000
Total (B)	163,773,980
Operating Profit (A-B)	19,838,540

Notes:-

1. Calculation of room nights (existing & new)

No. of existing properties = 12

No. of rooms per property = 200

Total existing rooms = 12*200 = 2400 rooms

Present Occupancy rate = 75%

Total rooms occupied per day = 2400*75% = 1,800 rooms per day

Total rooms occupied in a year of 365 days = 657,000 room nights

New properties to be added in Year 2 = 4 properties

Total properties in Year 2 = 12+4 = 16

Total rooms available = 16*200 = 3,200 rooms

Occupancy Rate in High Price Strategy = 65%

Total room nights in a year = 3200*365*65% = 759,200 room nights

2. Calculation of revenue in Year 2

Lodging Revenue =  $212 * 759,200 room nights = $ 160,950,400

Food & Beverage Revenue = $21 * 759,200 room nights * 85% = $ 13,551,720

where, $ 21 being Food & Beverage revenue per night is arrived at by [$13,797,000/657,000 room nights = $21]

This revenue is expected to be decreased by 15% in Year 2

Miscellaneous Revenue = $12 * 759,200 room nights = $9,110,400

3. Calculation of Food & Beverage Cost

Existing Cost per room night = $13,140,000/657,000 room nights = $20

This cost is expected to remain same in Year 2

So, Cost in Year 2 = $20 * 759,200 room nights = $1,518,400

4. Calculation of Miscellaneous Cost

Existing Cost per room night = $8,541,000/ 657,000 room nights = $ 13

This cost is expected to be increased by 20%

So, Cost in Year 2 = $ 13 * 759,200 room nights * 120% = $11,843,520

5. Calculation of Management Cost (Fixed)

= $2,501,000 * 106% = $2,651,060

6. Calculation of Marketing Cost (Fixed)

= $15,000,000 * 108% = $16,200,000

7. Calculation of Other Cost (Fixed)

= $8,001,000 (remain same)

8. Calculation of Utilties Cost (Fixed per property)

Cost per property = $37,200,000 / 12 = $ 3,100,000

Total Cost for 16 properties = $ 3,100,000 * 16 = $49,600,000

9. Calculation of Depreciation (Fixed per property)

Cost per property = 10,800,000 / 12 = $ 900,000

Total Cost for 16 properties = $ 900,000 * 16 = $14,400,000

10. Calculation of Labor Cost (Fixed & Variable Component)

Total existing cost = $38,976,000

Fixed component = $401,000*12 = $4,812,000

Variable Component = $38,976,000 - $4,812,000 = $34,164,000

Variable Cost per room night = $34,164,000/ 657,000 = $52

Year 2

Total Fixed Cost = $401,000*16 = $6,416,000

Total Variable Cost = $52 * 759,200 room nights = $39,478,400

Total Cost (Variable + Fixed) = $ 45,894,400