Case9-4 Self-constructed asset (page 295)

Due to growing demand of a new product, Jay Manufacturing, Inc. needs to expand its product line but cannot find an outside supplier for the expansion so decides to design and build the equipment. In 2017, a section of the plant was devoted to development of the new equipment and a special staff of personnel was hired. Within six months, a machine was developed at a cost of $170,000 that increased production and reduced labor cost substantially. Sparked by the success of the new machine, the company built three more machines of the same type at a cost of $80,000 each.

Required:

1. In general, what costs should be capitalized for a self-constructed asset?
2. Discuss pros and cons of including these charges in the capitalized cost of self-constructed assets:
   1. The increase in overhead caused by the self-construction of fixed assets
   2. A proportionate share of overhead on the same basis as that applied to goods manufactured for sale (consider whether the company is at full capacity)
3. Discuss the proper accounting treatment of the $90,000 ($170,000 - $80,000) by which the cost of the first machine exceeded the cost of the subsequent machines.

Exercise 9-11 Flexible Budget [LO9-1]

Lavage Rapide is a Canadian company that owns and operates a large automatic car wash facility near Montreal. The following table provides data concerning the company’s costs:

For example, electricity costs are $1,400 per month plus $0.07 per car washed. The company actually washed 8,200 cars in August and collected an average of $5.90 per car washed.

Required:

Prepare the company’s flexible budget for August.

Exercise 9-10 Planning Budget [LO9-1]

Lavage Rapide is a Canadian company that owns and operates a large automatic car wash facility near Montreal. The following table provides data concerning the company’s costs:

For example, electricity costs are $1,400 per month plus $0.08 per car washed. The company expects to wash 8,400 cars in August and to collect an average of $6.50 per car washed.

Required:

Prepare the company’s planning budget for August.

Superior Air Flights is considering the purchase of a helicopter to connect service between its base airport and a new field being built about 30 miles away. The choppers are assumed to be needed for only 6 years until a rapid transit service is completed. Estimates of the two craft under consideration are as follows:

Which option is cheaper per year and by how much? Use an interest rate of 10%. Also, what is the cost per mile if the copper flies 150 times between its base airport and new field per year. Show all work.

1. In general, the marginal cost (MC) curve is U-shaped as you learned in the lectures and the textbook. However, exception exists. Please provide at least one industry as an example to illustrate that MC is not U-shaped. Explain briefly the shape of MC in the industry.

2. Engineers at a national research laboratory built a prototype automobile that could be driven 180 miles on a single gallon of gasoline. They estimated that in mass production the car would cost $40,000 per unit to build. The engineers argued that Congress should force U.S. automakers to build this energy-efficient car. In your opinion, is energy efficiency the same thing as economic efficiency? Please explain your opinion and state whether you support it or not.

Please answer all of the two questions by one paragraph for each

1. In general, the marginal cost (MC) curve is U-shaped as you learned in the lectures and the textbook. However, exception exists. Please provide at least one industry as an example to illustrate that MC is not U-shaped. Explain briefly the shape of MC in the industry.

2. Engineers at a national research laboratory built a prototype automobile that could be driven 180 miles on a single gallon of gasoline. They estimated that in mass production the car would cost $40,000 per unit to build. The engineers argued that Congress should force U.S. automakers to build this energy-efficient car. In your opinion, is energy efficiency the same thing as economic efficiency? Please explain your opinion and state whether you support it or not.

Please answer all of the two questions by one paragraph for each.

Case Study:

James McBride, general manager of the new Ritz-Carlton in Washington, D.C., faced the largest
challenge of his successful career. A proven veteran of the luxury hotel chain’s march across Asia, cBride’s most recent assignment was as the general manager of the 248-room Ritz-Carlton in Kuala Lumpur. For the first time, The Ritz-Carlton was opening a hotel that was part of a multi-use facility. Owned by Millennium Partners and located in the historic Foggy Bottom district of Washington, D.C., the $225 million “hospitality complex” covered two-anda-
half acres and included 162 luxury condominiums, a 100,000 square-foot Sports Club/LA, a Splash Spa, three restaurants, 40,000 square feet of street-level restaurants and retail shops featuring the latest designs from Italy and other countries, as well as the 300-room hotel. While The Ritz-Carlton had already signed contracts to manage five other hotels for Millennium Partners, the upscale property developers had also inked deals with the Ritz’s foremost competitor—the Four Seasons.
Brian Collins, manager of hotels for Millennium Partners, had his own ideas about what constituted luxury service and how the hotel’s general manager should approach the new-hotel opening. Under pressure from Collins, McBride was reexamining the “Seven Day Countdown,” a hallmark of The Ritz-Carlton’s well-defined hotel-opening process. Any changes McBride made could not only affect his company’s future relationship with Millennium Partners but also the carefully guarded Ritz- Carlton brand.

Filling hotel rooms was crucial, and The Ritz-Carlton’s general managers aggressively pursued their
two main customer groups: (1) independent travelers, and (2) meeting event planners.

Because they attracted many individual guests at once, meeting event planners were seen as “the
vital few” customers, representing a small number of organizations that held many large meetings in various locations around the world. These “vital few” accounted for 40% of annual sales income.
"Our event business pays the mortgage. The individual traveler helps us with our
profitability. The nature of our business is that a guest room and space is the most perishable
product we have. An apple left unsold today can be sold tomorrow, but a room night lost
today is lost forever."

One of the components of the SQIs involved guest-recognition procedures. As an owner, Collins
wanted to see that improved for the new Washington, D.C. hotel:
I pushed James [McBride] to hire more people than The Ritz-Carlton staffing plan would
lead them to hire in Guest Recognition. I think it’s the single most important thing we can do.
If a guest came in, got what they wanted, and were recognized, all of a sudden that creates a
sticky relationship. It’s all about organizing your thoughts and creating processes to recognize
the person coming in to the hotel.
So after a certain number of visits to one of our Ritz hotels, guests will get a monogrammed
pillowcase. It will be in their room so that when they check in, they’ll go to their room and say,
“Oh, my pillow’s here. Isn’t that great!” And no one expects it, so the first time, it’s like
“Wow!” We’re doing something different from The Ritz-Carlton standard—we’re clearly
exceeding the standard. But they don’t force every owner to abide by that higher standard, so sometimes there is friction about raising the standard outside of the Ritz program. I want to rethink it, rethink it all from start to finish. And it just drives them crazy.

Human Resources at The Ritz-Carlton
The way The Ritz-Carlton viewed its employees was a distinguishing hallmark of the
organization. According to Leonardo Inghilleri, the corporate vice president of human resources:
We respect our employees. The issue of respect is a philosophical issue that is driven by
our leadership. You have to have a passion for people. If you have an accounting approach to
human resources, then you’re bound to fail. If you look at an employee and say, “He’s a fulltime
equivalent, he’s an FTE; he is eight hours of labor,” I think that’s immoral. An employee
is a human being who doesn’t only fulfill a function but should also have a purpose. So a
successful business is one that is capable of enlisting an employee not only for his muscles and
his labor, but also for his brain, his heart, and his soul.
In hotels that were up and running for at least a year, The Ritz-Carlton’s annual turnover rate was
only 20%, compared with the hotel industry average of 100%, while new hotels experienced turnover rates between 20% and 25% during the first 60 days. Inghilleri believed that it was his company’s deep respect for its employees that led to their satisfaction with and commitment to the organization.
The Ritz-Carlton was so intent on treating their employees well that a “Day 21” event was held as a process check three weeks after any new hire’s start date. During that session, the company assessed the degree to which it had lived up to the promises it made to its employees during orientation and initial training.
One of those promises included opportunities for career advancement, which were abundant at
The Ritz-Carlton. Corporatewide, 25% of the organization’s managerial workforce began their
careers at The Ritz-Carlton as hourly employees, such as dishwasher, housekeeper, and restaurant server, or as hourly supervisors.

Through the extensive formal and informal training offered by The Ritz-Carlton,
employees were prepared to fulfill their current obligations and to accept positions of greater
responsibility and accountability in the future. Employees with advancement ambitions were
encouraged to cross-train and learn about as many different aspects of the organization as possible.
Our employees are taught from the very beginning that there is nothing more exciting than fixing a mistake or defect. They want to see the defects, they want to find out what they are, because once that’s known, they can be corrected. We’ve never had a problem with people hiding mistakes, because it’s just not the culture of the company.

Staffing the New Hotel
The property owners had the right to approve the individuals nominated by The Ritz-Carlton for
three executive positions: general manager, director of marketing, and controller. Once McBride was selected as the general manager, he was instrumental in choosing the additional members of the hotel’s executive committee, almost all of whom had experience at other Ritz-Carlton properties. These leaders were in place about two and a half months prior to the scheduled hotel opening. The executive committee then selected their functional managers, who were, in turn, primarily responsible for hiring line-staff members. For positions that required technical expertise or high-level service delivery, individuals with significant prior experience were hired. For more entry–level positions, novices to the hospitality industry were acceptable.

The Seven Day Countdown was a result of the evolution and refinement of the hotel-opening
process, which became more solidified in the late 1980s to early 1990s when the hotel chain was
opening many new properties. The first two days were devoted entirely to orienting employees to The Ritz-Carlton culture and values, while the remaining five days involved more specific skills training and trial runs of service delivery. According to Collins, ensuring that everything was perfect on opening day would be a challenge:
There’s all this construction activity going on around here, finishing floors, testing the firealarm
system. And they have 400 people they have to convert to Ritz-Carlton employees in the
next seven days. They have to be trained and dipped into the culture of The Ritz-Carlton so
that on day one when Ms. Jones checks in, she’s getting a true Ritz experience. Seven days.
I’ve told James I just don’t know if that’s enough time.

Day One: Staff Orientation
On the first day of the countdown, new employees joined other members of their divisions
outside the hotel for what can only be described as a pep rally. As they slowly wound their way downstairs toward the ballrooms where their first training sessions would occur, the employees heard the sound of enthusiastic applause. It was coming from the hotel’s managers, who lined both sides of the curved marble staircase. Many times over, each employee was sincerely welcomed as a new member of The Ritz-Carlton family.

Once everyone was present, McBride introduced the hotel’s leadership team, followed by The Ritz-Carlton trainers, who had come from 23 different countries around the world for the countdown. Addressing all the employees of the new hotel, Schulze explained his philosophy of being a high-quality service organization:
You are not servants. We are not servants. Our profession is service. We are Ladies and
Gentlemen, just as the guests are, who we respect as Ladies and Gentlemen. We are Ladies
and Gentlemen and should be respected as such.

Day Two: Departmental Vision Sessions
On the second day of the Seven Day Countdown, employees in each functional area met for an
introduction to their new departments. Group exercises were used to help the employees learn more about one another, their likes and dislikes, and how they could function together as an effective unit.
For the next five days, the hotel’s leadership team, trainers, and managers met each morning at
6:00 a.m. to review the day’s training activities and to resolve any difficulties that had arisen.

The last three days of the Seven Day Countdown was when departmental technical training
occurred. Employees learned the details involved in performing their jobs to the standards set by
The Ritz-Carlton, and everyone was expected to master their department’s key production processes. Employees arrived in two shifts, dressed in their full uniforms, and every employee practiced his or her job as if they were serving real customers.

Recognizing that their standards of service were extremely high and that their goal of opening as
a top-notch hotel right from the start was a tall order, The Ritz-Carlton tried to protect their
employees from feeling overwhelmed by controlling the occupancy rate. Inghilleri explained:
The first month of operations, we may open the hotel with 50% occupancy. Then we’ll
increase occupancy monthly, so it takes us somewhere between three and four months to reach
80%. But we hire, in the very beginning, as if we’re already operating at 80% occupancy.
This allows us to reduce the number of tables a waiter has to serve, or the number of rooms
a housekeeper has to clean. It is more important that we set the standards immediately. They
have to do their jobs perfectly, even if it takes them longer; productivity will increase as they
get more and more comfortable. Flawless execution is the goal, and then speed will come.
On the day between the end of the Seven Day Countdown and the grand opening, employees showed up in casual attire for The Ritz-Carlton two-hour pep rally, marking the transition between practice runs and real service delivery. The next day, on October 11, 2000, the Washington, D.C., Ritz-Carlton Hotel opened for business.

Dilemma
McBride sat in his new office in Washington, reflecting on the concerns that Collins had
expressed, with his usual blunt style and candor, about the Seven Day Countdown. Collins
questioned whether the seven-day time frame limited the hotel’s ability to open at a higher
occupancy rate and to reach 80% occupancy in a shorter amount of time.
It was difficult to train new hires to meet the high expectations of The Ritz-Carlton service
standards in only seven days, but that was how The Ritz-Carlton worked. Maybe the training should be longer, but what would that mean for The Ritz-Carlton? McBride would be responsible for opening the second Millennium Partners-owned Ritz-Carlton hotel, in Georgetown, at the end of 2001. Should he try changing the Seven Day Countdown process, which was a worldwide best practice for the company?

Questions:

In what may be a first for the hospitability industry, Brian Collins, hotel owner, has asked James McBride, Ritz-Carlton general manager, to lengthen the amount of time spent training hotel employees before hotel opening. For this assignment, you are taking the role of James McBride.

1) What is the context of the decision? What is dilemma faced by the Ritz-Carlton?

2) Analysis of the situation:

• Monetary factors: what would be the monetary consequences of opening directly at 80% occupancy as requested by rather than ramping up from 50% to 80% over a four-month period of time?
• Non-monetary factors: what are the key non-monetary factors/considerations that are going to drive your decision?

What role does the 'built environment' play in health and health outcomes in our community?

Provide citations in APA style.

Provide and discuss a comprehensive definition of both the built environment and the social environment.

*Provide relevant references in APA style format.