Question

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 21 properties with an average of 200 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 75 percent, based on a 365-day year. The average room rate was $210 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 $ 138,060,000 Food & beverage 39,091,500 Miscellaneous 11,497,500 Total revenues $ 188,649,000 Costs Labor $ 79,873,500 Food & beverage 22,995,000 Miscellaneous 13,797,000 Management 2,509,000 Utilities, etc. 37,800,000 Depreciation 10,500,000 Marketing 16,500,000 Other costs 3,250,000 Total costs $ 187,224,500 Operating profit $ 1,424,500

In year 1, the average fixed labor cost was $409,000 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 four new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 75 percent. Management has made the following additional assumptions for year 2:

The average room rate will increase by 5 percent.

Food and beverage revenues per night are expected to decline by 20 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 25 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 8 percent, and marketing costs will increase by 10 percent.

Other costs are not expected to change.

The managers of HomeSuites are considering different pricing strategies for year 2. Under the first strategy ("High Price"), they will work to maintain an average price of $261 per night. They realize that this will reduce demand and estimate that the occupancy rate will fall to 65.0 percent with this strategy. Under the alternative strategy ("High Occupancy"), they will work to increase the occupancy rate by lowering the average price. They estimate that with an average nightly rate of $174, they can achieve an occupancy rate of 85 percent. The current estimated profit is $139,623,405.

Required:

a. Prepare the budgeted income statement for year 2 if the "High Price" strategy is adopted. (Round your per unit average cost calculations to 2 decimal places.)

Home Suites

Operating Income

Year 2

Sales Revenue

Lodging

Food & Bev.

MISC

Total Revenues

Costs

Labor

Food & Bev.

MISC

Management

Utilities, ECT

Depreciation

Marketing

Other Costs

Total Costs

Operating Profit

b. Prepare the budgeted income statement for year 2 if the "High Occupancy" strategy is adopted.

Home Suites

Operating Income

Year 2

Sales Revenue

Lodging

Food & Bev.

MISC

Total Revenues

Costs

Labor

Food & Bev.

MISC

Management

Utilities, ECT

Depreciation

Marketing

Other Costs

Total Costs

Operating Profit

Answer 1

a)	Year: 2, High Price Strategy
	Particulars			$
	Sales Revenue
	Lodging
	(261×25×200×365×0.65)			309611250
	Food & Bevearage			32266000
	{39091500×(25/21)×0.80×(0.65/0.75)}
	MISC			11862500
	{11497500×(25/21)×(0.65/0.75)}
A)	Total Revenues			353739750
	Costs
	Labor			95087500
	{79873500×(25/21)}
	Food & Bevearage			23725000
	{(22995000×(25/21)×(0.65/0.75)}
	Miscellaneous			17793750
	{(13797000×1.25×(25/21)×(0.65/0.75)}
	Management			3225857.14
	{(2509000×1.08×(25/21}
	Utilities, etc.			45000000
	{(37800000×(25/21)}
	Depreciation			12500000
	(10500000×25/21)
	Marketing			18150000
	(16500000×1.1)
	Other costs			3869047.62
	{(3250000×(25/21)}
B)	Total Cost			219351154.76
C)	Operating Profit (A-B)			134388595.24

b)	Year: 2, High Occupancy Strategy
	Particulars			$
	Sales Revenue
	Lodging
	(174×25×200×365×0.85)			269917500
	Food & Bevearage			42194000
	{39091500×(25/21)×0.80×(0.85/0.75)}
	MISC			15512500
	{11497500×(25/21)×(0.85/0.75)}
A)	Total Revenues			327624000
	Costs
	Labor			95087500
	{79873500×(25/21)}
	Food & Bevearage			31025000
	{(22995000×(25/21)×(0.85/0.75)}
	Miscellaneous			23268750
	{(13797000×1.25×(25/21)×(0.85/0.75)}
	Management			3225857.14
	{(2509000×1.08×(25/21)}
	Utilities, etc.			45000000
	{(37800000×(25/21)}
	Depreciation			12500000
	(10500000×25/21)
	Marketing			18150000
	(16500000×1.1)
	Other costs			3869047.62
	{(3250000×(25/21)}
B)	Total Cost			286419904.76
C)	Operating Profit (A-B)			41204095.24