Question

Individual case study

Management accounting measures analyzes and reports financial and nonfinancial information to internal managers. The goal is to use past performance to predict the future. The internal reports should plainly inform managers of the financial results of actual operations. The reports should also show how activities can be changed to affect and improve what will happen in the future. Business operations are complex sets of activities, and to maximize profit considerable information, analysis, and decision making is required in advance of actual action. Decisions are needed when there are real alternatives that managers can choose from to deal with operating problems. Without high-quality information, business could not be conducted. David Diamond is the owner of the Galaxy chain of four-star prestige hotels. These hotels are in Chicago, London, Los Angeles, Montreal, New York, Seattle, Tokyo, and Vancouver. Diamond is currently struggling to set weekend rates for the Vancouver hotel (the Vancouver Galaxy). From Sunday through Thursday, the Galaxy has an average occupancy rate of 90%. On Friday and Saturday nights, however, average occupancy declines to less than 30%. Galaxy’s major customers are business travellers who stay mainly Sunday through Thursday. The current room rate at the Galaxy is $180 a night for single occupancy and $216 a night for double occupancy. These rates apply seven nights a week. For many years, Diamond has resisted having rates for Friday and Saturday nights that are different from those for the remainder of the week. Diamond has long believed that price reductions convey a “nonprestige” impression to his guests. The Vancouver Galaxy highly values its reputation for treating its guests as “royalty.” Most room costs at the Galaxy are fixed on a short-stay (per-night) basis. Diamond estimates the variable costs of servicing each room to be $24 a night per single occupancy and $26.40 a night per double occupancy. Many prestigious hotels in Vancouver offer special weekend rate reductions (Friday and/or Saturday) of up to 50% of their Sunday-through-Thursday rates. These weekend rates also include additional items such as breakfast for two, a bottle of champagne, and discounted theatre tickets.

Forecasting outcomes is the heart of a decision. There will almost always be a gap between what was expected and what is actually realized because the future cannot be predicted with accuracy. A good decision process includes a post-implementation assessment and explanation of the key causes of differences between expected and actual outcomes. This is how managers learn from their experiences.

required

Write a report from the standpoint of Dimond and include all the following concerns:

a. Would you recommend that Diamond reduce room rates at the Vancouver Galaxy on Friday and Saturday nights? What factors to protect the value proposition should be considered in his decision?

b. In six months’ time, the Grey Cup is to be held in Vancouver. Diamond observes that several four-star prestige hotels have already advertised a Friday-through Sunday rate for Grey Cup weekend of $360 a night. Should Diamond charge extra for the Grey Cup weekend? Explain.

Answer 1

(a) I would recommend that Diamond reduce room rates at the Vancouver Galaxy on Friday and Saturday nights. Demand and supply factors needs to be considered before setting the room rates. The demand on friday and saturday is less. Quality of services should be maintained to protect the value proposition. Average occupancy declines to less than 30 percent on friday and saturday nights. The plan to cover only variable costs must be made for friday and saturday nights. The rate of rooms should be reduced with the reduction in demand. The rate for single occupancy can be fixed at $30 because variable cost is $24. The rate for double occupancy can be fixed at $35 because variable cost is $ 26.40. Diamond should ignore fixed costs while setting room rates of friday and saturday. There must be flexibility in fixing room rates . The rates of rooms must change with the change in demand and supply. Keeping constant prices for all days in a week can be a bad decision. Rigidity in fixing prices must be avoided.

(b) Diamond should charge extra for the Grey Cup weekend because demand is going to increase . Room rates should be increased with the increase in demand. Diamond should charge the rate of $ 350 to earn higher profits along with charging less than their competitors. Diamond should monetize the opportunity provided by the Grey Cup to increase the room rates. A large number of tourists who will visit Vancouver during the occasion of Grey Cup will provide a chance to increase rates of rooms and make more profits. Limited rooms along with large number of tourists seeking rooms gives a fantastic opportunity to increse room rates. Business environment must always be taken into consideration while deciding the rates of rooms. A successfull businessman keeps scanning the business environment and makes decision according to the situations of environment.