Question

Individual Case Analysis(35%)

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 are 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

Answer:-

a.                  The three factors that Diamond should consider in pricing decisions are:

Customers. The major customers (“guests” to Diamond) of the Galaxy are business travellers who predominantly stay on a Sunday-through-Thursday basis. Diamond should consider these issues:

(1)        Will some of the $180/$216-a-night customers staying Sunday through Thursday transfer their business to Friday or Saturday for reduced rates? If a sizable number of these customers can transfer their business to Friday or Saturday nights, Diamond should be reluctant to make sizable weekend price discounts.

(2)        Will a new set of customers be attracted to the Galaxy with a reduced weekend rate, people who would not be attracted at the $180/$216-a-night rates?

(3)        How will seasonality affect the business? Will there be more tourists, and therefore less need for a discount, at certain times of the year?

The business customers of Galaxy likely will understand cost-volume-profit relationships for hotels and not be offended at different rates for different days of the week. “Off-peak” pricing is an accepted convention in many industries (such as in telecommunications and airlines).

Competitors. Many prestige hotels already offer sizable price discounts on weekends. Moreover, cuts of up to 50% are the nominal price discounts. The additional items included in weekend packages (such as breakfast or a bottle of champagne) add to the effective price discount.

Costs. The variable costs of servicing each room are only $24 a night per single occupancy and $26.40 a night per double occupancy. Any room rate above these amounts will make a positive contribution to Galaxy’s operating income.

It is an accepted convention that weekend rates at Vancouver’s prestige hotels will be lowered on Friday and Saturday nights. Diamond may want to offer moderate price reductions and add other discounted items in the weekend package. The approach may help maintain the policy of treating guests as “royalty.”

A Finnish student commented that hotels in Finland provide customers who have a high volume of business in peak periods with complimentary rooms in the off-peak period.

b.         The customers, competitors, and cost factors that apply to setting the rates for Grey Cup weekend include:

Customers. The likely customers can be classified as:

(1)        Long-term Galaxy hotel customers, and

(2)        Other customers.

Charging the market rate (even if it is $360 a night) is not likely to alienate other customers. Diamond’s problem lies with long-term customers. He may want to offer preferred reservations or “normal” weekday ($180/$216-a-night) rates to his regular customers on Grey Cup weekend.

Competitors. Several four-star prestige hotels are already advertising $360 a night rates. Thus, Galaxy will not be viewed as the first to adopt an “aggressive price-gouging” approach.

Hotels often increase their rates because of increased demand even when costs do not increase. It is unlikely that the Galaxy chain would be singled out for negative publicity from such a policy, especially if it made an effort to give preferential bookings and rates to its regular customers.

Costs. The variable costs of servicing each room are the same as in the answer to requirement a.