Question

Cheap Stay Inc. is considering building a budget hotel that offers clean small rooms with bathrooms. They anticipate that the 120 rooms will rent for 36,000 room-nights per year. The market price for equivalent rooms is $60 per night. Cheap Stay estimates that the cost of capital will be $7,900,000 and they would like an annual return on 15%. Following are the estimated annual operating costs:

Variable operating costs $18 per room night

Fixed Costs:

Salaries and wages $450,000

Building maintenance 86,000

General administration 230,000

Total fixed costs $766,000

REQUIRED:

1. What is the full cost per room-night?

2. Can Cheap Stay Inc. meet the targeted return on investment based on the estimated costs and revenue? Show your calculations.

3. A tour operator has offered $30 per room per night for 20 rooms during a time of the year that there is likely to be at least that many rooms vacant. Should Cheap Stay Inc. accept this offer?

Answer 1

variable cost		18
fixed cost;
salary & wages	450000
building maintainence	86000
general administration	230000
	766000
room nights	36000
fc per room night	766000/36000	21.27778
1)
total cost		39.27778
2)
room rent		60
cost		39
return		21
target return
(7900000*15%)	1185000
room nights	36000
return /room night	1185000/36000	32.91667
difference		11.91667
NO, Cheap Stay Inc. don'n meet the targeted return on investment based on the estimated costs and revenue
3)
room rent	30
variable cost	18
contribution	12
yes, cheap stay inc. should accept this offer as it will give $ 12 contribution after covering its variable cost