Question

Donald has recently lost his job as the President of a large North American country and has returned to the family hotel business. Their most prestigious hotel Tramp Tavern has been closed for two years whilst it has undergone refurbishment and the hotel is about to be relaunched. The hotel runs conventionally and has a number of cost centres such as Reception, Concierge, Repairs and Maintenance which are relatively fixed. The hotel also has variable costs relating to cleaning and servicing rooms. You have been provided with the following data regarding the re-furbished Tramp Tavern: Available Rooms 400 Average Room Tariff (per night) $230 Fixed Financing Costs $10 million Fixed Operating Costs $15 million Variable Operating Costs (per night when occupied) $50 Required a) What is the breakeven point (in total room rentals for the year) for the Tramp Tavern? Show the percentage of occupancy that the hotel must achieve in order to break even (show all calculations) (2.5 marks)
b) Donald expects the property to achieve 70% occupancy over the year. What will be his Net Profit (Loss) for the year if they achieve that level of occupancy? (2.5 marks)
c) Hotel rooms (like airline seat tickets) are services that are referred to as ‘perishable’ in that they expire if they are not used on a certain date (they cannot be stored). Donald has determined that he can increase the hotel’s occupancy from 70% to 95% by subscribing to a last-minute deals provider. However, should he do so the average room tariff Tramp Tavern will receive will fall from $230 per night to $190 per night. Provide the profit calculation to demonstrate whether Donald should or should not go ahead with the offer from the lastminute deals provider to sign. (2.5 marks)
d) Briefly discuss any other business issues that Donald should consider before making up his mind whether to proceed with the last-minute deals agreement.

Answer 1