Advanced: Contracting hotel accommodation based on uncertain demand Crabbe, the owner of the 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 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 restau¬ rant, 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 the winter.

(1) ‘Normal business in September will depend on weather conditions, and the probabilities of occupancy from normal business 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 Air- travel’s package tourists will only bring us £3 per guest-night after variable costs. Air- travel 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 a 60% discount.
(2) ‘When we come to the winter, trade is usually so bad that we close for three months. We retain only a skeleton staff, costing £1500 per month, and general overheads are reduced from £8000 to £2000. 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 our basic winter trade at reduced prices, together with income from confer¬ ences, would be as follows:

‘Alternatively, I am considering offering a series of language courses. We could not take any other guests, and I estimate the

‘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 cost would only be £1 per guest- night.
We would have to spend about £5000 per month on tutors, and the courses would also have to be advertised beforehand at a cost of £1500.’
Assume 30-day months throughout.
Requirements:

(a) Calculate the number of guest-nights Crabbe should contract to Airtravel Tours at the quoted 40% discount. (6 marks)

(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 worth¬ while to contract at this price. (4 marks)

(c) Assess which of the winter options Crabbe should undertake and state any reservation you may have about your assessment.
(9 marks)

(d) Briefly explain the criteria on which you have identified costs to assess Crabbe’s business options in requirements

(a) to (c). (6 marks)
(Total 25 marks) ICAEW P2 Management Accounting

Transcribed Image Text:

() Depreciation Staff wages and benefits General overheads (rates, electricity, etc) Interest on mortgage and bank loan 12 500 8000 2200 1800 Repayments on mortgage and bank loan 2500 Drawings for my own needs 1000 28 000