11-58 Profitability Analysis; Pricing HomeSuites Inn is a national chain of high-quality hotels, which is popular with business travelers. Many of HomeSuites' best customers will stay for a week or longer during their business trip. Top management of the hotel chain made a strategic move in the prior year to raise profitability by raising room rates an average of 10 percent, from an average of $80 to $88. HomeSuites' main competitors (the total market for hotels that compete with Home- Suites is about 50,000,000 daily room occupancy per year) responded by keeping their rates low, and as a result, HomeSuites' sales fell from 5,000,000 annual room occupancy to 4,000,000 rooms, a 20 percent fall in room sales, and a new low in occupancy rate for the firm. The fall in room sales was greater than expected, so HomeSuites consulted a marketing expert who explained that custom- ers in this market are very sensitive to price changes, and furthermore, that while a reduction in price increases volume and an increase in price reduces volume, the effect is not proportional; price decreases improve sales at a faster rate than price increases reduce sales. HomeSuites is now consid- ering a reduction in price to $76, with the expectation of increasing sales by as much as 50 percent over the current level of 4,000,000 rooms. The consultant assures HomeSuites that if it returned to the $80 price, sales would return to the 5,000,000 level. The table below shows the room costs per occupied rooms at various annual occupancy levels. Room Occupancy (thousands) 4,000 4,500 5,000 5,500 6,000 6,500 Per Room Costs Supplies $ 3.30 $ 3.32 $ 3.28 $ 3.31 $ 3.31 $ 3.30 Direct labor 15.41 15.37 15.41 15.40 15.38 15.31 Overhead (see note) Room level 10.55 10.48 10.46 10.44 10.59 10.48 Hotel level 23.35 21.01 19.12 18.01 16.33 15.11 Total operating cost $52.61 $50.18 $48.27 $47.16 $45.64 $44.20 Selling and administrative 30.11 27.66 25.12 22.88 21.01 19.43 Total cost $82.72 $77.84 $73.39 $70.04 $66.65 $63.63 Note: Room-level overhead costs are laundry, housekeeping, and supplies, which vary with the number of rooms occupied; hotel-level overhead includes general maintenance, registration staff , pool expense, and other expenses, which do not vary with the number of rooms occupied. Selling and administrative expense is the cost of hotel management, the reservation network, and other fixed costs. Required What do you think is the best strategy for HomeSuites regarding room pricing? Develop a spreadsheet analysis that shows what would be the effect on contribution of the different pricing policies HomeSuites has used or is considering