Hoa Sen University

Vatel Program - Hotel & Tourism Business School

FINAL ASSIGNMENT
MANAGEMENT II
GES201

Student: PHAN GIA BAO

Student ID: 1910007

Class: MA2-2019

Date: 04/06/2021
 ❖ Cases

Managerial accounting is concerned with providing information to managers who are people
inside an organization who direct and control its operations. You are hired to help a manager
of Thousand Star Hotel in Saigon make better business decisions. The hotel has 110 single
and 90 double rooms. Single rooms sell for an average of $6.7 per night and a $3.7 variable
cost is incurred cleaning the rooms. The double rooms have an average rate of $8.9 and
variable cost $3.9 to clean. The hotel has annual fixed costs of $180.000.

Single rooms Double rooms

Number of rooms 110 90

Room rate $6.7 $8.9

Variable cost/room night $3.7 $3.9

Annual fixed costs $180,000

❖ Problem Solving

a. The manager wants to know the breakeven point for each type of room. At first, list down
specific costs associated with the operation of the hotel and then classify them as either
variable or fixed with respect to the number of room nights sold.

Fixed costs (not immediately affected by Variable costs (change in direct proportion
changes in volume) to changes in volume)

- Salaries and wages - Utility expenses (telephone,

- Marketing expenses
- Depreciation of room equipment
- Land/building renting
electricity, gas, water, laundry,...)
- Inventory and supplies (food and
beverage, amenities, toilet paper,...)
- Repair and maintenance

b. Determine breakeven point for each type of room.

● Total rooms = single rooms+double rooms = 110+90 = 200 (rooms)

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 ● Single rooms percentage = (110÷200)×100% = 55%

● Double room percentage = (90÷200)×100% = 45%

● Breakeven point = Total fixed costs÷Contribution margin

Breakeven point = 180,000÷[(6.7–3.7)×55%+(8.9–3.9)×45%]

Breakeven point = 46,154 (room nights/year)

⟶ Breakeven point of single rooms = 55%×46,154 = 25,385 (room nights/year)

⟶ Breakeven point of double rooms = 45%×46,154 = 20,769 (room nights/year)

c. Determine the occupancy rate to earn annual profit of $62,100.

● Total occupied room nights to achieve the targeted profit

= (Total fixed costs+Targeted profit)÷Contribution margin

= (180,000+62,100)÷[(6.7-3.7)×55%+(8.9-3.9)×45%]

= 62,076.92 (rooms)

● Total room nights available for sale per year = 200×365 = 73,000 (rooms)

⟶ Occupancy rate

= (Total occupied room nights÷Total room nights available for sale per year)×100%

= (62,076.92÷73,000)×100%

= 85.04%

Imagine the hotel has a high occupancy in the dry season and a low occupancy in the rainy
months. During dry months average occupancy levels are 90%, and during the rainy months
average occupancy is 30%. The manager requires a report that analyzes the hotel’s
profitability. Variable costs move in line with occupancy levels.

d. Complete the report and evaluate the performance of the hotel.

Dry season ($) Rainy season ($) Total ($)

Sales 252,616.5 84,205.5 336,822

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 Variable costs 124,501.5 41,500.5 166,002

Fixed costs 90,000 90,000 180,000

Total costs 214,501.5 131,500.5 346,002

Net profit 38,115 (47,295) (9,180)

● Single room sales in dry season = $6.7×110×(365/2)×90% = $121,052.25

● Double room sales in dry season = $8.9×90×(365/2)×90% = $131,564.25

⟶ Sales in dry season = $121,052.25+$131,564.25 = $252,616.5

● Single room sales in rainy season = $6.7×110×(365/2)×30% = $40,350.75

● Double room sales in rainy season = $8.9×90×(365/2)×30% = $43,854.75

⟶ Sales in rainy season = $40,350.75+$43,854.75 = $84,205.5

⟶ Total sales = $252,616.5+$84,205.5 = $336,822

● Variable costs in dry season

= Variable costs of single rooms+Variable costs of double rooms

= [$3.7×110×(365/2)×90%]+[$3.9×90×(365/2)×90%]

= $124,501.5

● Variable costs in rainy season

= Variable costs of single rooms+Variable costs of double rooms

= [$3.7×110×(365/2)×30%]+[$3.9×90×(365/2)×30%]

= $41,500.5

⟶ Total variable costs = $124,501.5+$41,500.5 = $166,002

● Total costs = Fixed costs+Variable costs

Dry season = $90,000+$124,501.5 = $214,501.5

Rainy season = $90,000+$41,500.5 = $131,500.5

Total = $214,501.5+$131,500.5 = $346,002

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 ● Net profit = Sales–Total costs

Dry season = $252,616.5–$214,501.5 = $38,115

Rainy season = $84,205.5–$131,500.5 = –$47,295

Total = $38,115–$47,295 = –$9,180

Evaluate the performance of the hotel: In the dry months with high occupancy levels, the
hotel generates profit ($38,115). However, it makes a loss ($47,295) in rainy season when the
rate of occupancy is low (30%). As a consequence, with the unavoidable fixed costs and the
increase of variable costs in proportion with the number of rooms sold, profit in dry season
cannot be expected to cover the rainy months’ loss, which leads to the overall loss at the end
of the year ($9,180).

e. Would it be wrong to conclude from this that the hotel should be closed during rainy
season due to the unfavorable performance?

If we open the hotel during rainy season, the loss in the whole year would be $9,180.

If we close the hotel during rainy season, there would be no sales and variable costs during
these months, so the profit/loss in the whole year would be:

Profit/Loss = Sales–Variable costs–Fixed costs

= $252,616.5–$124,501.5–$180,000

= –$51,885

Open the hotel during rainy Close the hotel during rainy
season ($) season ($)

Sales 336,822 252,616.5

Variable costs 166,002 124,501.5

Fixed costs 180,000 180,000

Profit (Loss) (9,180) (51,885)

Loss if closing = $51,885 > Loss if opening = $9,180.

In consequence, the loss in keeping the hotel open during rainy season is lower than closing.
Therefore, it would be wrong to conclude from above that the hotel should be closed during

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rainy season due to the unfavorable performance. We should not close the hotel during rainy
season if we don't want to suffer heavier losses.

f. The above-mentioned shutdown or continue decision is made using relevant cost analysis.
Are there other applications of relevant cost analysis in managerial decision making?
Describe and establish illustrative situations for different decision problems of the hotel
management.

There are other applications of relevant cost analysis in managerial decision making:

● Keep-or-Drop Decisions: Decisions as the above-mentioned shutdown or continue the

decision. Managers need to determine which business units they want to maintain, add
or remove. A choice to add or eliminate something is primarily based on the expenses
involved.

● Special Discount Decisions: Decisions as to whether a special discount is to be

applied for the goal of selling or to keep client loyalty. Higher sales will take place
when the hotel offers a special deal to sell and reward a group of potential consumers.
To find out who is loyal to the brand, the management needs to establish the target
group of customers, then provide the potential guests with affordable pricing for the
products/services. As a result of special offers and discounts, customers grow loyal,
boosting the turnover rate. For example, in the case of Thousand Star Hotel, in order
to increase the occupancy rate in rainy season, we might consider giving a discount
package.

● Outsourcing Decisions: Decisions involve choices between internal and external

production, which consider the acceptance or rejection of usage of the external source.
If it costs less when outsourcing a product, managers should consider taking it in
order to reduce expenses as much as feasible. The cost of operating the hotel washing
services for the guests, for example, is more than the cost of hiring the external
washing service or not.

● Product Mix Decisions: Decisions to optimize and make the maximum profit on the
number of each product for sale. These decisions may have a major influence on the
profitability of an organization so as to take into account the maximum profit of each
sale and net profit of each product. Select possible items that can achieve the biggest
sales.

● Sell or Further Process Decisions: Decisions if products are to be divided into a

separate sale or processed in order to make even more profit. The manager who
decides to sell a product, or process it for additional revenues, now refers to it. If we
decide to proceed further, profits earned by additional procedure must exceed profits
earned by the split-office stage. For instance, if we enhance the quality of hotel
services, the management should determine if the income gained might cover the
remodelling costs.

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 ❖ Conclusion

Managerial accounting provides data to managers and owners who are participating in a
company and directly controlling its operations. It allows the management of the company to
make accurate calculations and smart business decisions to run effectively and maximize the
profit of the company, which is Thousand Star Hotel in Saigon in this assignment.