A hotel budget for the year 2021 indicates that the leisure hotel is relatively full towards the end of the year but has significant capacity in the first 9 months of the year. The hotel owner is concerned that this underutilisation is hurting his profitability and thinks that he needs to introduce an incentive scheme to address this issue. Revenue for the year is estimated to be R50 million and arises from three profit centres. Accommodation 50% Restaurant 30% Bar 20% Total 100% The three profit centres have the following percentage gross margins:

		Accommodation		Restaurant		Bar
		%		%		%
Revenue	10	100		100		100
Room cleaning cost
Cost of Goods Sold	-		60		45
Other Cost	15		20		5
Direct Costs		25		80		50
Gross Margin		75		20		50

You can assume that all Direct costs shown above are Variable. Fixed costs for the year are estimated to be R15 650 000. The balance sheet reflects Equity of R100 million being the Share Capital of R80 million and retained earnings of R20 million. You are required: a. to calculate the budgeted return on Equity based on the above. (10 marks) As a means of improving the return on Equity, two alternative suggestions have been made by his auditors which would address the poor occupancy rate in the first 9 months of the year: 1. To offer special two-night holidays at the 50% reduced price of R1200 per night. It is expected that those accepting the offer would spend a further R500 in the restaurant, and another R400 in the bar. 2. Or 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.