tii alas 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 aver the years, It has no restaurant or bar. It is pasitioned as a mid-price, good quality “destination” resort hotel, /iew Manor is open only during the skiing season. It opens on December 2 and closes the last day of March, ‘The sls muni tees operates on 2 perm ome sat hallows oy 5D days of operation per yea, ash ofthe 0 roo n ieee ng et fr SI for single secgmny or $20 for double soapy. The est wing ofthe Hel has 30 roms all of ch five etl views ofthe ings, he mona, athe vile Rooms ins wing et fr 820 an 825 for Siglo: dobleocspany,respesvely, ‘The average osupancy rate daring he season abo 80% Coil, he Hotel nl on weekends snd averages 50 fo 60 rooms oouped em week nigh). The tatloof single versus double occupancy 2:8, on aera: Operating results for the last fiscal year are shown in Exhibit 1. Mr. Kacheck, the manager of the hotel, is concemsed 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 hote only atthe fend 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 oscupaney rate for the off-season to be between 20% and 40% for the next few years. Kacheck estimates that with carefil attention tothe off. Season clientele a 40% occupancy rate for the 30 rooms during the off-season would be much more Likely ifthe owners would commit $4,000 for advertising each year ($500 for each of 8 months), ‘There is 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 815 for singles and doubles. ‘The managers salary is p off-season and also contracts most wing would not interfere with this repair and maintenance, aid over 12 months, He acts asa caretaker of the facilities during the ofthe repair and maintenance work during that time, the west Work, but would cause an estimated additional $2,000 per year for 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 dey 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, itis 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 fimetion of the number of rooms occupied. The other half ofthe miscellaneous expenses ae fixed and would not change with 12 month operation. Linen is rented from a supply house and the ost also depends on the number of rooms occupied, but is twice as much, on average, for double occupancy as for single cecupancy. The ualiies include two items: telephone and electricity.26 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 @ $3.00imonth $240 Basie Service Charge 30 $290 During the off-season, only the basic service charge is paid. The tionthly charge of $3 is applicable only to active telephones. ‘An additional aspect of Mr. Kacheck’s proposal is that @ covered and heated swimming pool be added to the hotel. Mr. Kacheck believes that this would increase the probability thatthe off-season occupancy rate would be above 30%. Precise estimates are impossiblo. Itis felt that although the winter occupancy rate will not be greatly affected by adding an indoor pooi, eventually such a poo! will have to be built to stay even with the competition The cost of such a pool is estimated 0 be $40,000. This amount could be depreciated over 5 years with no salvage value ($15,000 of the $40,000 is fora plastic bubble and the heating units, whieh would be used nine months ofthe yet). The only other costs associated with the swimming pool are S400 per month fora 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, ‘2 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 1S September, the warmest period of the year), and there would be no heating expense. Skyview Manor EXHIBIT 1 Skyview Manor Operating Statement, For the Fiseal Year ended 3/31/62 Revenues $160,800 Expenses Salaries Manager ‘$15,000 Managers Wife 2,400 Desk Clerk 2,880 Maids (four) 72.200 77.480 Payroll Taxes and Fringe Ber 5,496 Depreciation (15 year life) 30,000 Property Taxes Insurance Repairs and Maintenance Cleaning Supplies Unies Linon Service Interest on Morigage(5% interest rate) 21,716 Miscellaneous Expenses 7314 Total Expenses 38.4 Profit before Federal Income Taxes 322,300 Federal Income Taxes (499%) 10747 Net Profit sues QUESTIONS 1, On average, how many rooms must be rented each night in season for the hotel t0 breakeven? 2, The hotel is fll 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 forthe year, per Exhibit 19 ‘What is the proposed! ineremental contribution margin per occupied room/day during the offseason? 4, For each altemative in the case, list the annual expenses that are incremental to that decision altemative but ate not related to the room/days occupied 5, For each decision alternative ealeulate the occupancy rate necessary to break even on the incremental anntal expenses. 6. What alterative do you recommend? Why? 7. Evaluate the profitability of the Hotel as an investment for iis owners. Does this affect your answer to question 6?