Advanced: CVP analysis and decision making based on number of holidays to be sold by a hotel
Question:
Advanced: CVP analysis and decision¬ making based on number of holidays to be sold by a hotel A hotel budget for the forthcoming year shows the following room occupancy:
Revenue for the year is estimated to be £3 million and arises from three profit centres:
Accommodation* 45%: Restaurant 35%: Bar 20%:
Total 100%
*The accommodation revenue is earned from several different categories of guest, each of which pays a different rate per room.
The three profit centres have the following percentage gross margins:
Fixed costs for the year are estimated to be 565 000. Capital employed is 7 million. As a means of improving the return on capital employed, two suggestions have been made: (i) to offer special two-night holidays at a reduced price of 25 per night. It is expected that those accepting the offer would spend an amount equal to 40% of the accommodation charge in the restaurant, and 20% in the bar. (ii) to increase prices. Management is confident that there will be no drop in volume of sales if restaurant prices are increased by 10% and bar prices by 5%. Accommodation prices would also need to be increased.
You are required
(a) to calculate the budgeted return on capital employed before tax; (5 marks)
(b) to calculate (i) how many two-night holidays would need to be sold each week in the three off-peak quarters to improve the return on capital employed (ROCE) by a further 4% above the percentage calculated in
(a) above; (5 marks)
(ii) by what percentage the prices of accom¬ modation would need to be increased to achieve the desired increase in ROCE shown in
(b) (i) above; (5 marks)
(c) to explain briefly the major problems likely to be encountered with each of the two sugges¬ tions and recommend which should be adopted, assuming that they are mutually exclusive.LO1
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