Question

3. (Revenue Management) Berkeley Bed and Breakfast has 12 rooms, the room price is $200 per night, the marginal cost of cleaning, etc., for having a room occupied is $30, and it costs the B&B $100 to turn away customers who have reservations. Customers with reservations have a 5% chance of canceling, without penalty. Assume there are no walk-ins (all customers reserve in advance). How many reservations should be accepted to maximize the expected profit? (Hint: This will require a little bit of trial and error, and this is not a newsvendor problem.)

Answer 1

Answer:

Given that Berkeley Bed and Breakfast has 12 rooms.

room price is $200 per night marginal cost of cleaning, etc., for having a room occupied is $30, and it costs the B&B $100 to turn away customers who have reservations.

Customers with reservations have a 5% chance of canceling, without penalty

for 12 reservations, then the demand = 12x 95/100 = 11.4

profit is 12x170 = $2040

for 11 customers, profit = 11x(200-30) = $1870

If they accept 14 reservations, occupancy will be 13.3.

if they accept 13 customers, they may loose $100 for turn away.

They shall accept 13 reservations to get maximum.