In: Accounting
HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 20 properties with an average of 150 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 70 percent, based on a 365-day year. The average room rate was $215 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 | $ | 138,130,000 | |
Food & beverage | 22,995,000 | ||
Miscellaneous | 12,264,000 | ||
Total revenues | $ | 173,389,000 | |
Costs | |||
Labor | $ | 58,142,500 | |
Food & beverage | 18,396,000 | ||
Miscellaneous | 13,797,000 | ||
Management | 2,516,000 | ||
Utilities, etc. | 37,500,000 | ||
Depreciation | 10,500,000 | ||
Marketing | 11,000,000 | ||
Other costs | 4,200,000 | ||
Total costs | $ | 156,051,500 | |
Operating profit | $ | 17,337,500 | |
In year 1, the average fixed labor cost was $416,000 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 six new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 70 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 $285 per night. They realize that this will reduce demand and estimate that the occupancy rate will fall to 60.0 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 $194, they can achieve an occupancy rate of 80 percent. The current estimated profit is $75,358,035.
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.)
c. Which is the correct pricing strategy for year 2.
High Price Strategy | |
High Occupancy Strategy | |
Current Strategy |