Question

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HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 24 properties with an...

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 24 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 80 percent, based on a 365-day year. The average room rate was $220 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 $ 138,170,000
Food & beverage 29,433,600
Miscellaneous 14,016,000
Total revenues $ 181,619,600
Costs
Labor $ 66,144,000
Food & beverage 21,024,000
Miscellaneous 14,016,000
Management 2,520,000
Utilities, etc. 38,400,000
Depreciation 12,000,000
Marketing 14,000,000
Other costs 7,000,000
Total costs $ 175,104,000
Operating profit $ 6,515,600

In year 1, the average fixed labor cost was $420,000 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 80 percent. Management has made the following additional assumptions for year 2:

  • The average room rate will increase by 10 percent.
  • Food and beverage revenues per night are expected to decline by 25 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 30 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 5 percent, and marketing costs will increase by 5 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 $230 per night. They realize that this will reduce demand and estimate that the occupancy rate will fall to 70.0 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 $190, they can achieve an occupancy rate of 90 percent. The current estimated profit is $259,025,200.

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.)

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

Solutions

Expert Solution

Given information:

For Year 1

HomeSuites has 24 properties with an average of 200 rooms in each property, having occupancy of 80%.

Total rooms/nights ocupied = 200 x 24 x 365 days x 80% = 1,401,600 nights for year 1

Analysis of costs for Year 1:

1. Labor costs = $66,144,000

Fixed labor costs = $420,000 per property

Total Fixed labor costs = $420,000 x 24 = $10,080,000

Total Variable labor costs =  $66,144,000 - $10,080,000 = $56,064,000

Variable cost per night = $56,064,000 / 1,401,600 = $40 per night

2. Food & beverage cost = $21,024,000

Variable Food & beverage cost per night = $21,024,000 / 1,401,600 = $15 per night

3. Miscellaneous cost = $14,016,000

Varaible Miscellaneous cost = $14,016,000 / 14,016,000 = $1 per night

4. Utilities cost = $38,400,000

  Utilities cost per property = $38,400,000 / 24 = $1,600,000 per property

5. Depreciation cost = $12,000,000

  Depreciation cost per property = $12,000,000 / 24 = $500,000 per property

6. Marketing and other costs are fixed for the firm = $14,000,000 + $7,000,000 = $21,000,000

Data for Year 2 will be:

4 new properties will be opened in Year 2 with same number of rooms per property.

Total rooms available = 28 properties x 200 rooms per property = 5,600 rooms

Total nights for the year = 5,600 rooms x 365 days = 2,044,000 nights for year

Total nights, if occupancy is 90% = 2,044,000 x 90% = 1,839,600

Total nights, if occupancy is 80% = 2,044,000 x 80% = 1,635,200

Total nights, if occupancy is 70% = 2,044,000 x 70% = 1,430,800

Food & beverage revenue per room = $29,433,600/ 1,401,600 = $21 per night x 75% = $15.75 per night

Miscellaneous revenue per room = $14,016,000 / 1,401,600 =$10 per night

Miscellaneous cost per room = 14,016,000/ 1,401,600 = $10 per night = $10 x 130% = $13 per room

a. Budgeted income statement for year 2 if the “High Price” strategy is adopted:

Occupancy rate = 70% = 1,430,800 nights

Average room price per night = $230 per night

Item $
Lodging (1,430,800 x $230) $329,084,000
Food & Beverage revenue (1,430,800 x $21) x 75% 22,535,100
Miscellaneous (1,430,800 x $10) 14,308,000
Total Revenues $365,927,100
Costs:
Labor (1,430,800 x $40) + ($420,000 x 28) $68,992,000
Food & beverage (1,430,800 x $15) 21,462,000
Miscellaneous (1,430,800 x $13) 18,600,400
Management ($2,520,000 x 105%) 2,646,000
Utilities ($1,600,000 x 28) 44,800,000
Depreciation ($500,000 x 28) 14,000,000
Marketing ($14,000,000 x 105%) 14,700,000
Other costs (No Change) 7,000,000
Total Costs $192,200,400
Operating Profit $173,726,700

b. Budgeted income statement for year 2 if the “High Occupancy” strategy is adopted:

Occupancy rate = 90% = 1,839,600 nights

Average room price per night = $190 per night

Item $
Lodging (1,839,600 x $190) $329,084,000
Food & Beverage revenue (1,839,600 x $21) x 75% 28,973,700
Miscellaneous (1,839,600 x $10) 18,396,000
Total Revenues $392,805,700
Costs:
Labor (1,839,600 x $40) + ($420,000 x 28) $85,344,000
Food & beverage (1,839,600 x $15) 27,594,000
Miscellaneous (1,839,600 x $13) 23,914,800
Management ($2,520,000 x 105%) 2,646,000
Utilities ($1,600,000 x 28) 44,800,000
Depreciation ($500,000 x 28) 14,000,000
Marketing ($14,000,000 x 105%) 14,700,000
Other costs (No Change) 7,000,000
Total Costs $219,998,800
Operating Profit $176,894,900

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