Skyview

Manor

1. On average, how many rooms must be rented each night in season for the hotel to breakeven?

About 51 rooms must be rented each night during the peak season for the hotel to breakeven.
Break-even number of rooms each night
total sales
Fixed costs
Variable costs per room:
Contribution margin
CM Ratio
Break-even in dollars
Break-even ($/day)
Break-even rev from dbl/day
Number of doubles /day
Break even rev from sgl/day
Number of singles/day
total number of rooms

160800
$ 77,973
$ 60,437
$ 100,363
62%
$ 124,927.10
$ 1,041.06
$ 832.85
$ 38
$ 208.21
12
50.63

rooms
East Wing
West Wing
Total Rooms available
Avg Occupancy winter
Winter days
Manager annual salary
Manager wife/day
Desk clerk/day
Maid/day
Maids peak
Payroll Taxes/Fringe Benefits
Depreciation
Property Taxes
Insurance (Just Winter)
Repairs and Maintenance (Just winter)
# Rooms Rented in Winter at 80% Occupancy
Cleaning Supplies/room
Miscellaneous Fixed
Miscellaneous variable
Linen (just winter)
Linen /double room
Linen/single room
Rooms rented
telephones/room/month
telephones: basic charge/month
Telephones (just winter)
Electricity/ available room (just winter)
Interest on Mortgage
Rooms

Double rate

dbl rate
50
30
80

120
$ 15,000
20
24
15
4
20%
$ 30,000
$ 4,000
$ 3,000
$ 17,204
7680
$ 0.25
$ 3,657
$ 3,657
$ 13,920
$ 1.51
$ 0.76

fixed
variable
variable
variable


fixed
fixed
partially variable
partially variable

3 variable
50 fixed
1160
variable
$ 65
$ 21,716
fixed
Dbl Rev

sgle rate
20
15
25
20

single rate

Single
Rev

East Wing
West Wing
Total rooms available
Average Occupancy Rate
Average Rate
Avg Revenue/Day

50
30
80
80%

20
25

640
480

80%
21.75

15
20

1120

20%
16.875

120
96

216

2. The hotel is full on weekends in the ski season. If all room rates were raised $5 on weekend nights, but
occupancy fell to 72 rooms instead of 80, what is the revised profit before taxes for the year, per Exhibit 1?
If room rates were raised by $5 on weekend nights and occupancy fell, the revised profit before taxes would be
$24,982.
Revenue
Expenses

$ 162,681.30
Salaries

Manager

Manager's Wife


Desk Clerk



Maids






Payroll
Taxes


Depreciation


Property Taxes


Insurance (Just winter)


Repairs (just winter)


Cleaning Supplies


Utilities


Linen Service


Interest



Misc. Expenses
Total Expenses



Profit before Taxes

Income Taxes


Net
Profit

$ 15,000
$ 2,400
$ 2,880
$ 7,200
$ 27,480
$ 5,496
$ 30,000
$ 4,000
$ 3,000
$ 17,204
$ 1,850
$ 6,360
$ 13,412
$ 21,716
$ 7,181

Weekend nights in winter

35

Weekday nights in winter

85
90%

Weekend occupancy at regular rates

weekday occupancy at regular rates
Average Occupancy
Average rate weekday
average rate weekend
Weekend total rooms
Weekday total rooms

69%
80%
$ 20.78
$ 25.88
2520
4692

x
x
x
x
$ 137,699
$ 24,982
$ 11,992
$ 12,991

Weekday revenue

$ 97,476.30

weekend revenue

$ 65,205.00
$ 162,681.30

Total Revenue

Winter days
Manager annual salary

120
$ 15,000 fixed

Manager wife/day

20 variable

Desk clerk/day

24 variable

Maid/day

15 variable

Maids peak

Depreciation

20%
$ 30,000 fixed

Property Taxes

$ 4,000 fixed

Insurance (Just Winter)

$ 3,000 partially variable

Repairs and Maintenance (Just winter)

$ 17,204 partially variable

Payroll Taxes/Fringe Benefits

# Rooms Rented in Winter at 80% Occupancy

7680

Miscellaneous Fixed

$ 0.25
$ 3,657

Miscellaneous variable

$ 3,657

Linen (just winter)

$ 13,920
$ 1.51

Cleaning Supplies/room

Linen /double room

Linen/single room
Rooms rented

$ 0.76
7212
3 variable

telephones/room/month
telephones: basic charge/month

50 fixed

Telephones (just winter)

1160

Electricity/ available room (just winter)

$ 65 variable

Interest on Mortgage

$ 21,716 fixed

3. What is the proposed incremental contribution margin per occupied room/day during the off-season?

Here we are trying to determine how much incremental contribution to the profit per occupied room/day during
the off-season. Contribution margin is determined as follows: Sales COGS variable operating expenses. The
average revenue per occupied room/day is $14.

4. For each alternative in the case, list the annual expenses that are incremental to that decision alternative but
are not related to the room/days occupied?

5. For each decision alternative calculate the occupancy rate necessary to break even on the incremental annual
expenses.
6. What alternative do you recommend? Why?

I recommend opening the west wing year round as only a 2% occupancy rate would justify doing this. I would
hold off on building the pool as it is a major capital expenditure and makes it much riskier that it will breakeven
on the investment. Moreover, it is not entirely clear what effect the pool will have on the occupancy rate.
Therefore, since it is very likely the hotel can maintain 2% occupancy rates during the off-season, and likely
much more than that, this is the best and most profitable choice.


7. Evaluate the profitability of the Hotel as an investment for its owners. Does this affect your answer to
question 6?

The profit margin of the hotel (profit as a percent of sales) is $11k/160k = 7%. However, if they decide to open
the hotel for the summer they would need to reach 24% occupancy in order to reach the same absolute profits
of about $11k and their profit margin would drop to 6%. The only way they can maintain profit margins of 7 to
7.5% would be to get occupancy during the off-season of 30%, which is definitely not a sure thing.
One option would be to try opening the hotel for the off-season for one-year and testing what occupancy rates
they can expect. If they are lower than they need, they could always decide not to open the hotel during the
off-season in the future. This option does not exist for the pool options. Once they decide to build a pool they
will have incurred a major capital expenditure and will likely need to support this investment over time in order
to please their clientele who might have gotten used to having a pool.
Therefore, while the business is quite profitable as is, I would still choose to open the hotel in the summer
months.