In: Accounting
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 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.)
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 |