The Majestic Hotel

Case Study
Preparation For The Final Exam
2010
 The Majestic Hotel
Condensed Balance Sheets
December 31, 2006 and 2007
2006 2007
Cash € 15,000 € 30,000
Accounts Receivable 160,000 190,000
Inventory 27,000 30,000
Property and Equipment 1,320,000 1,400,000
Other Assets 280,000 200,000
Total Assets €1,802,000 € 1,850,000

Accounts Payable € 120,000 € 140,000

Wages Payable 7,000 10,000
Current Maturities –LTD 50,000 50,000
Long-term Debt 1,050,000 1,000,000
Total Liabilities 1,227,000 1,200,000
Owners’ Equity 575,000 650,000
Total Liabilities and Owners’ € 1,802,000 € 1,850,000
Equity
 The Majestic Hotel
Condensed Income Statement
December 31, 2007

Sales € 1,400,000
Cost of Goods Sold 125,000
Contribution Margin 1,275,000
Undistributed Operating Expenses 850,000
Income after Undistributed Operating Expenses 425,000
Depreciation Expense 150,000
Amortization Expense 80,000
Income before Tax 195,000
Income Tax 65,000

Net Income € 130,000

 Additional Information
• Equipment was purchased for €230,000.
• Dividends of €55,000 were declared and
paid during 2007.
• Long-term debt of €50,000 was
reclassified as current at the end of 2007.
 The Majestic Hotel
Statement of Cash Flows
For the Year Ended December 31, 2007

Cash Flows from Operating Activities:

Net Income __________
Adjustments to reconcile net income to net
Cash flows from operating activities:
Depreciation __________

Amortization __________

Increase in accounts receivable __________

Increase in inventory __________

Increase in accounts payable __________

Increase in wages payable __________

Net Cash Flows from Operating Activities __________

Cash Flows from Investing Activities:
Purchases of equipment __________

Net Cash Flows from Investing Activities __________

Cash Flows from Financing Activities:

Payment of current maturities – LTD __________

Payment of Dividends __________

Net Cash Flows from Financing Activities __________

Increase in Cash __________

Cash – Beginning of the year __________

Cash – End of the year __________

 Ratios
• Calculate the following ratios
1. Current Ratio
2. Acid Test Ratio
3. Debt-Equity Ratio
4. Operating Efficiency Ratio
5. Profit Margin
6. Return on Owners’ Equity
7. Return on Total Assets
 Contribution Margin
• The average daily room rate is €90. The
variable costs per room are €11.50. The
fixed costs are €850,000.
1. What is the breakeven level of annual
revenue for the hotel?
2. What is the level of annual revenue
required so the hotel can earn an
operating income of €40,000?
 Budgeting
• The room price is €90 per night.
• Budgeted sales for the next three months are:
– April 930 rooms
– May 1050 rooms
– June 1395 rooms
• The hotel’s experience is that 60% of the sales
are cash sales and 40% is taken the following
month. Accounts receivable on the 1st April are
€32,400.
 Budgeting
• The operating costs of running the hotel
are as follows:
– April €31,840
– May €33,200
– June €39,340
• The hotel pays 70% of its costs in the
month of operation and the remaining 30%
in the following month. The accounts
payable on the 1st April are €19,000.
 Budgeting
• Wage costs are paid in full monthly and
are as follows:
– April €21,357
– May €22,590
– June €25,326
 Budgeting
• The Majestic Hotel has a €10,000 line of credit
at the bank with a zero balance on April 1st.
• Maintains a €5,000 minimum cash balance.
• Pays interest at 12% when a principle payment
is made.
• Purchases Plasma televisions for the rooms
costing €22,000 in April and installs air
conditioning in June at a cost of €31,000.
• Pays a €34,500 cash dividend in May.
• Has a €5,000 cash balance on April 1st.
 Budgeting
• Complete the operations budget and cash
budget.
 The Majestic Hotel
Operations Budget
April – June 2008

Revenue __________
Expenses:
Operating Costs __________

Wages __________

Total Expenses __________

Operating Income __________

Less Interest Expense __________

Net Income (Before Tax) __________

 The Majestic Hotel
Cash Budget

April – June 2008

April May June
Beginning Cash _____ _____ _____

Cash Receipts _____ _____ _____

Cash Available _____ _____ _____

Cash Payments:
Operating Costs _____ _____ _____

Wages _____ _____ _____

Equipment Purchase _____ _____ _____

Dividends _____ _____ _____

Total Cash Payments _____ _____ _____

Balance before financing _____ _____ _____

Borrowing _____ _____ _____

Principle repayment _____ _____ _____

Interest _____ _____ _____

Ending Cash Balance _____ _____ _____

 Budgetary Control
• The Majestic Hotel gives you the following
figures:
– Budgeted room sales 900
– Estimated average price per room €90
– Actual room sales 9% lower
– Actual average price per room 3% higher

Calculate the price variance, volume

variance and price-volume variance.
 Budgetary Control
• The hotel budgeted 450 hours for cleaners to
clean the rooms based on a work standard of 30
minutes per room. The actual hours worked
were 420 hours. The estimated average wage
rate for cleaners is €5.00 per hour. The wages
paid totalled €2,058.
– Calculate the efficiency Variance
– Calculate the rate variance
– How would you rate the manager?