Crabbe, the owner of Ocean Hotel, is concerned about the hotels finances and has asked your advice.
Question:
Crabbe, the owner of Ocean Hotel, is concerned about the hotel’s finances and has asked your advice. He gives you the following information:
We have rooms for 80 guests. When the hotel is open, whatever the level of business, we have to meet the following costs each month:
For our normal business we charge an average of £20 per night for each guest. Each guest night involves variable costs of £4 for laundry and cleaning. Guests also spend money in the restaurant, which on average brings us another £5 per guest night after meeting variable costs.
I need advice on two problems, one concerns the month of September and the other relates to winter.
(a) Normal business in September will depend upon weather conditions, and the probabilities of occupancy from normal business in that month are:
Airtravel Tours has enquired about a block booking at a discount in September. I intend to quote a discount of 40% on our normal guest night charge. In the restaurant, Airtravel’s package tourists will only bring us £3 per guest night after variable costs. Airtravel could take all our capacity, but I have to decide how many guest nights to offer. The contract will mean that I agree in advance to take the same number of Airtravel tourists every night throughout September. If they won’t accept my price, I would be prepared to go as far as 60% discount.
(b) When we come to the winter, trade is usually so bad that we close for three months.
We retain only a skeleton staff, costing £1,500 per month, and general overheads are reduced from £8,000 to £2,000 per month. I am trying to find ways of keeping open this winter, but staying open will incur the full monthly outgoings.
If we remained open for all three months I estimate that our basic winter trade at reduced prices, together with income from conferences, would be as follows:
If the courses are offered we shall have to run them for the full three months irrespective of the take up. The charge per night would be £24, and the revenue from the restaurant net of variable costs would only be £1 per guest night.
We would have to spend about £5,000 per month on tutors, and the courses would also have to be advertised beforehand at a cost of £1,500.
Assume 30-day months throughout.
Required
(a) Calculate the number of guest nights Crabbe should contract to Airtravel Tours at the quoted 40% discount.
(b) Determine the minimum price per guest night at which it would be worthwhile for Crabbe to do business with Airtravel, and the maximum number of guest nights it would be worthwhile to contract at this price.
(c) Assess which of the winter options Crabbe should undertake and state any reservations you may have about your assessment.
(d) Briefly explain the criteria on which you have identified costs to assess Crabbe’s business options in requirements
(a) to (c).
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