Skyview Manor
This case study is set in 1962 in rural Vermont. The Skyview Manor is an old, but well
‘maintained property that has changed ownership several tines over the years. It has no
restaurant or bar. Itis positioned as a mid-price, good quality “destination” resort hotel.
‘The Skyview Manor is open only during the skiing season. It opens on December 2 and closes the last
day of March. The ski mountain it serves operates on a permit from the state which allows only 120
days of operation per year. Each ofthe 50 rooms in the east wing rents for $15 for single occupancy or
$20 for double occupancy. The west wing of the hotel has 30 rooms, all of which have spectacular
views of the skiing slopes, the mountains, and the village. Rooms in this wing rent for $20 and $25 for
single or double occupancy, respectively. The average occupancy rate during the season is about 80%
(typically, the Hotel is full on weekends and averages 50 to 60 rooms occupied on week nights). The
ratio of single versus double occupancy is 2:8, on average.
‘Operating results for the last fiscal year are shown in Exhibit 1. Mr. Kacheck, the manager of
the hotel, is concerned about the off-season months, which show losses each month and reduce the high
profits reported during the season. He has suggested to the owners, who acquired this hotel only at the
end of the 1961 season, that to reduce the off-season losses, they should agree to keep the west wing of
the hotel operating year-round. He estimates the average occupancy rate for the off-season 0 be
between 20% and 40% for the next few years. Kacheck estimates that with careful attention to the off
season clientele a 40% occupancy rate for the 30 rooms during the off-season would be much more
likely if the owners would commit $4,000 for advertising each year ($500 for each of 8 months). There
js no evidence to indicate that the 2:8 ratio of singles vs. doubles would be different during the
remainder of the year or in the future. Rates, however, would have to be drastically reduced. Present
plans are to reduce them to $10 and $15 for singles and doubles.
“The manager's salary is paid over 12 months. He acts as a caretaker of the facilities during the
off-season and also contracts most of the repair and maintenance work during that time. Using the west
wing would not interfere with this work, but would cause an estimated additional $2,000 per year for
repair and maintenance.
Mrs. Kacheck is paid $20 a day for supervising the maids and helping with check-in. During
the season, she works 7 days a week. The regular desk clerk and each maid are paid on a daily basis at
the rate of $24 and $15 respectively. The payroll taxes and other fringe benefits are about 20% of the
payroll. Although depreciation and property taxes would not be affected by the decision to keep the
‘west wing open, insurance would increase by $500 for the year. During the off-season, it i estimated
that Mr. and Mrs, Kacheck could handle the front desk without an additional person. Mrs, Kacheck
‘would, however, be paid for 5 days a week.
‘The cleaning supplies and half ofthe miscellaneous expenses (room supplies) are considered a
direct function of the number of rooms occupied. The other half of the miscellaneous expenses are
fixed and would not change with 12 month operation. Linen is rented from a supply house and the
cost also depends on the number of rooms occupied, but is twice as much, on average, for double
‘oceupancy as for single occupancy. The utilities include two items: telephone and electricity26
There is no electricity expense with the motel
closed. With the motel operating, electricity expense is a
function of the number of rooms available to the public.
Rooms must either be heated or air-conditioned. The
telephone bills for each of the four seasonal months were
as follows:
80 Telephones @ $3.00/month $240
Basie Service Charge 30
$290
During the off-season, only the basic service
charge is paid. The monthly charge of $3 is applicable
only to active telephones.
‘An additional aspect of Mr. Kacheck's proposal
is that a covered and heated swimming pool be added to
the hotel. Mr. Kacheck believes that this would inerease
the probability that the off-season occupancy rate would
bbe above 30%. Precise estimates are impossible. Iti felt
that although the winter occupancy rate will not be greatly
affected by adding an indoor pool, eventually such a pool
will have to be built to stay even with the competition.
‘The cost of such a pool is estimated to be $40,000. This
amount could be depreciated over 5 years with no salvage
value ($15,000 of the $40,000 is for a plastic bubble and
the heating units, which would be used nine months of the
year). The only other costs associated with the swimming
pool are $400 per month for a lifeguard, required by law
during the busy hours; additional insurance and taxes,
estimated to be $1,200; heating cost of $1,000; and a
yearly maintenance cost of $1,800. Ifthe pool is covered,
‘a guard would be needed for 12 months. If it is not
covered, a guard would be needed only for 3 summer
‘months (from 15 June to 15 September, the warmest
period of the year), and there would be no heating
expense.
EXHIBIT 1
Skyview Manor
Operating Statement, For the Fiscal Year ended 331/62
Revenues ‘$160,800
Expenses
Salaries
Manager $15,000
Manager's Wife 2,400
Desk Clerk 2,880
Maids (four) 2.200
$27,480
Payroll Taxes and Fringe Benefits 5.496
Depreciation (15 year life) 30,000
Property Taxes 4,000
Insurance 3,000
Repairs and Maintenance 17,208
Cleaning Supplies 1920
Utilities 6,360
inen Service 13,920
Interest on Mortgage(S% interest rate) 21,716
Miscellaneous Expenses 7314
Total Expenses 138.410
Profit before Federal Income Taxes $22,390
Federal Income Taxes (48%) 10,747
Net Profit, S163
QUESTIONS
1. On average, how many rooms must be rented each
2
night in season for the hotel to breakeven?
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?
‘What is the proposed incremental contribution margin
per occupied roomvday during the off-season?
|. For each alternative in the case, list the annual
expenses that are incremental to that decision
altemative but are not related to the room/days
occupied.
For each decision alternative calculate the occupancy
rate necessary to break even on the incremental annual
expenses.
5. What alternative do you recommend? Why?
Evaluate the profitability of the Hotel as an investment
for its owners. Does this affect your answer to
question 6?