Question

1. The Sleep Well Corporation operates many hotels throughout the world. Suppose one of its Chicago hotels is facing difficult times because of the opening of several competing hotels. To accomodate its flight personnel, Air One has offered Sleep Well a contract for the coming year that provides a rate of $75 per night per room for a minimum of 45 rooms for 365 flights. This contract would assume Sleep Well of selling 45 rooms of space nightly, even if some of the rooms are vacant on some nights. Assume zero variable costs. The Sleep Well manager has mixed feelings about the contract. On several peak nights during the? year, the hotel could sell the same space for $175 per room. Suppose the Sleep Well manager signs the contract. What is the opportunity cost of the 45 rooms on October? 20, the night of a big convention of retailers when every nearby hotel room is? occupied? What is the opportunity cost on December? 28, when only 9 of these rooms would be expected to be rented at an average rate of $105??

If the? year-round rate per room averaged $85?, what percentage of occupancy of the 45 rooms in question would have to be rented to make Sleep Well indifferent about accepting the? offer?

PLEASE EXPLAIN HOW YOU GOT THE ANSWER WITH STEPS.

Answer 1

Solution:

Formulae used:

Steps:

1. To calculate opportunity cost for Oct 20, we will first calculate maximum profit we could have made if we had not made the contract and sold at $175 per room per night. This profit = $175*45 = $7,875.

Now, we will calculate how much we are actually making by selling the rooms at fixed contract rate of $75 per room. This profit = $75*45 = $3,375.

Now, we made much less than what we could have made had we not made a contract. So, we made less money of how much? = $7,875 - $3,375 = $4,500.

Similarly, you can find for Dec 28 also.

For occupancy rate, its a simple straight forward formulae, which is already explained in the snapshot showing formulae above. Please refer to that.