Question

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 15 properties with an average of 210 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 80 percent, based on a 365-day year. The average room rate was $190 for a night. The basic unit of operation is the "night," which is one room occupied for one night.

The operating income for year 1 is as follows:

HomeSuites Operating Income Year 1 Sales revenue Lodging $ 138,020,000 Food & beverage 29,433,600 Miscellaneous 10,117,800 Total revenues $ 177,571,400 Costs Labor $ 61,263,000 Food & beverage 18,396,000 Miscellaneous 11,957,400 Management 2,505,000 Utilities, etc. 36,000,000 Depreciation 13,500,000 Marketing 10,000,000 Other costs 2,500,000 Total costs $ 156,121,400 Operating profit $ 21,450,000

In year 1, the average fixed labor cost was $405,000 per property. The remaining labor cost was variable with respect to the number of nights. Food and beverage cost and miscellaneous cost are all variable with respect to the number of nights. Utilities and depreciation are fixed for each property. The remaining costs (management, marketing, and other costs) are fixed for the firm.

At the beginning of year 2, HomeSuites will open five new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 80 percent. Management has made the following additional assumptions for year 2:

The average room rate will increase by 10 percent.

Food and beverage revenues per night are expected to decline by 25 percent with no change in the cost.

The labor cost (both the fixed per property and variable portion) is not expected to change.

The miscellaneous cost for the room is expected to increase by 30 percent, with no change in the miscellaneous revenues per room.

Utilities and depreciation costs (per property) are forecast to remain unchanged.

Management costs will increase by 5 percent, and marketing costs will increase by 5 percent.

Other costs are not expected to change.

Required:

Prepare the budgeted income statement for year 2. (Round your per unit average cost calculations to 2 decimal places.)

Home Suites

Operating Income

Year 2

Sales Revenue

Lodging

Food and Beverage

MISC

Total Revenues

Costs

Labor

Food and Beverage

MISC

Management

Utilities, ECT

Depreciation

Marketing

Other Costs

Total Costs

Operating Profit

Answer 1

Room Occupancy in Year 1 = 15x210x365x80% = 919,800

(15 properties each with 210 rooms filled with 80% occupancy for 365 days in year 1)

Room Occupancy in year 2 = 20x210x365x80% = 1,226,400

(20 properties each with 210 rooms filled with 80% occupancy for 365 days in year 2)

Sales Revenue:-

Lodging:

Lodging revenue for year 1 (919,800 occupancy)= 13,80,20,000

Loding revenue for year 3 (1,226,400 occupancy +10% increase in average room rent) = (13,80,20,000x 1226400/919800)*110/100= 202,429,333.33

Food & Beverage Revenue

Food & Beverage for year 1 (919800 occupancy) =2,94,33,600

Food & Beverage for year 2 (1226400 occupancy& revenue is expected to decline by 25%) = (29433600x1226400/919800)x75/100= 2,94,33,600.

Miscellaneous Revenue:

miscellaneous revenue for year 1 = 10,117,800

miscellaneous revenue for year 2 (It is given that there is no change in miscellaneous revenue per room) = 10117800*1226400/919800 = 13,490,400

Cost:

Labour cost in year 1 = 61,263,000

Fixed labour cost = 405,000*15 = 60,75,000 (since fixed labour cost is $ 405,000 per property)

Variable labour cost = 61,263,000-60,75,000 = 55,188,000

variable cost per room = 55,188,000/919,800 = 60

Labour cost for year 2 = Fixed labour cost + Variable Labour cost

= (405,000x20) + (1,226,400x60) = 81,684,000

(As fixed component is 405000 per property & variable component per room is 60)

Food & Beverage cost:

Food & Beverage cost for year 1 (with 919800 occupancy) = 18,396,000

Food & Beverage cost for year 2 (with 1,226,400 occupancy) = 18396000x1226400/919800 = 24,528,000

Since Food & beverage cost is variable.

Miscellaneous cost:

Miscellaneous cost for year 1 (919800 occupancy) = 11,957,400

Miscellaneous cost for year 2 (1226400 occupancy & miscellaneous cost for the room is expected to increase by 30 percent) = (11957400x1226400/919800)x130/100 = 20,726,160

Management, Marketing cost, other cost:

Management, Marketing, and other costs are fixed for the firm & Management costs will increase by 5 percent, and marketing costs will increase by 5 percent.

Management cost for year 1 = 25,05,000

Management cost for year 2 = 2505000x105/100 = 2,630,250

Marketing cost for year 1 = 10,000,000

Marketing cost for year 2 = 10,000,000x105/100 = 10,500,000

Other cost for year 1 = 2,500,000

Other cost for year 2 = 2,500,000 (As there is no change in other cost)

Utilities, Depreciation cost:

As utilities and depreciation costs (per property) are forecast to remain unchanged.

Utility cost for year 1 (for 15 properties) = 36,000,000

Depreciation cost for year 1 (for 15 properties) = 13,500,000

Utility cost for year 2 (for 20 properties) = 36000000x20/15 = 48,000,000

Depreciation cost for year 2 (for 20 properties) = 1350000020/15 = 18,000,000

Therefore Budgeted income for year 2

Home Suites

Operating Income

Sales Revenue		$
	Lodging	202,429,333.33
	Food & Beverage	29,433,600.00
	Miscellaneous	13,490,400.00
	Total Revenue	245,353,333.33
Cost
	Labour	81,684,000.00
	Food & Beverage	24,528,000.00
	Miscellaneous	20,726,160.00
	Management	2,630,250.00
	Utilities	48,000,000.00
	Depreciation	18,000,000.00
	Marketing	10,500,000.00
	Other Costs	2,500,000.00
	Total Costs	208,568,410.00
	Operating Profit	36,784,923.33