A.1. Case background and site description

You have been hired by the general manager (GM) of a budget hotel in Colorado. The hotel is part of a large economy lodging chain in North America. Economy lodging hotels include Super 8, Motel 6 and Days Inn. They are typically small, free-standing hotels with no food and beverage outlets (i.e., restaurants and bars), no conference or banquet facilities, no meeting spaces, and limited services. There is a single output: the provision of rooms for one or more nights. While there are "single" and "double" rooms, differences are minor so there is no need to use weighted-average prices or costs. With a single output, there is one obvious cost

driver: the number of rooms rented. An economy lodging "property" typically has 110 rooms, although size may range from 60 to 175 rooms. Rooms are basic and there are few amenities. Room access is typically from the building's exterior. Like chain restaurants, economy lodging hotels develop standard properties to minimize construction costs.

A typical property is staffed by a GM, five front desk workers, five housekeepers, a head housekeeper, a laundry worker, and a maintenance worker. Wages for all hotel workers other than the GM are at or slightly above the minimum wage; this is the result of high employee turnover and low-skill positions. Recruiting and training costs for employees, other than the GM, are minimal. The GM has a great deal of autonomy in running the day-to-day operations of the hotel. The GM is supervised by a district manager who typically oversees eight to fifteen properties, visiting each property every four to six weeks. GMs are responsible for pricing (with corporate oversight), local advertising, hiring and terminating hotel staff, selecting local suppliers for unique products or services (e.g., landscaping, snow removal and major repairs), purchasing and maintaining an inventory of standard products (e.g., soap, linens, coffee and cleaning supplies), and conducting sales calls with local businesses.

GMs participate in the budgeting process, although the procedure varies somewhat depending on the district manager and the individual manager (i.e., some area managers prefer a top-down approach whereas others support a participative bottom-up approach). GMs are evaluated using both financial and non-financial metrics. A modest bonus is awarded to GMs who achieve their profit goals for the year. Additional bonuses are awarded for achieving customer satisfaction and internal audit targets. A property's financial targets for the bonus vary depending on local economic conditions and the physical condition of the assets. As with the budgeting process, the district manager may choose to negotiate the target with the GM or simply impose a target of her/his choosing. GMs who do not achieve a minimum, company-wide audit score (also the threshold for the bonus) for three years are to be terminated (despite this requirement, the chief financial officer could not remember this ever happening). The quality target is corporate-wide, but the specific figure depends on the property's age (i.e., newer or renovated properties are held to a higher target than older, more run-down properties).

A.2. Estimating the hotel's cost function Next week is the Area Manager's Meeting.

Your GM wants to look good in front of her boss, the district managers and other general managers. To begin your analysis, you must estimate the hotel's cost equation. The accounting department provided you with three years (2018-2020) of monthly data. These data consist of the following items:

Item Description

Rooms available: A measure of capacity. Rooms out of service (for repairs) lower this measure.

Rooms rented: Number of rooms sold each month (i.e., sales volume)

Rooms revenues: Total revenues received for rooms rented.

Other revenues: Includes vending machines, Internet access, laundry, etc.

Total revenues: The sum of room revenues and other revenues.

Front office: Wages for the general manager and the front desk staff.

Housekeeping: Wages for housekeepers, housekeeper supervisor and laundry worker.

Other personnel: Wages for the maintenance worker, payroll taxes, benefits, etc.

Total personnel: The sum of front office, housekeeping and other personnel expenses.

Supplies Expenses: related to cleaning supplies, in-room amenities, coffee, etc.

Other expenses: All expenses not otherwise classified (e.g., advertising)

Repairs Expenses: related to paint, plumbing supplies, electrical supplies, etc.

Energy Expenses: for gas, electricity and water.

Other utilities: Expenses for trash pickup, cable television, telephone equipment, etc.

A.3. Required

1. Identify the cost object (i.e., the dependent, or y variable).

2. Identify the cost driver (i.e., the independent, or x variable).

3. Plot the data to assess whether a linear (mixed cost) model is appropriate. Are there anyunusual data points that should be removed or transformed?

4. How much data should be used in the cost equation? Must you adjust for inflation?

5. Estimate the cost equation.

6. Evaluate the cost equation.

B.1. Case background

January 2021. The GM has asked you to prepare a CVP analysis to aid in discussing next year's financial expectations at the upcoming Area Managers' Meeting. The meeting brings together 45 hotel managers and three district managers from the Southwest Region. From your managerial accounting class, you learned that break-even sales volume is computed using fixed costs and the unit contribution margin. Since you will be forecasting break-even for this year (2021), you need to make several adjustments to the three years of historical data you obtained. These adjustments are described as follows:

Price.You examine the average selling price (i.e., average daily rate) for the past two years and decide that the hotel's room rate for next year will continue the same trend; in other words, you will realize the same percentage increase (or decrease) that was experienced in the past year. For example, if your rate increased 8% from 2019 to 2020, you will then forecast the 2021 room rate

to be 8% above 2020's room rate.

Costs.Your hotel's variable and fixed costs are obtained from the (A) case, in which you estimated the hotel's cost equation. After consultation with industry experts, you predict fixed costs will be the same next year. Further, you expect the variable cost per room-night to increase 4.5% due to inflation. Based on your analysis of local market data, you believe that sales volumes will remain flat; that is, the number of rooms rented in 2021 will be unchanged from the 2020 sales volume.

B.2. Required

1. What are the assumptions of CVP analysis?

2. Compute the breakeven sales volume for 2021.

3. Calculate the margin of safety.

4. Determine the degree of operating leverage. What happens to leverage at different levels of planned sales volume? Hint: Compute operating leverage at sales volumes of 50% and 120% of the 2021 planned sales volume.

5. Provide a CVP plot and label the different attributes of the plot. Provide a brief interpretation of your figure

Case Deliverables:

You are asked to write up your findings in a professional memo to be sent to the GM. You will need to not only provide a written memo but also the Excel workbook utilized to perform your analysis. Within your Excel workbook you will include (at a minimum) all data, cost analysis and CVP chart. Within an (optional) Tableau workbook, you may elect to include charts which aid in the interpretation/visualization of your conclusions. In addition to the items required in sections A and B, you are to include at least 4 observations within your memo about sales and cost trends, helping your boss utilize historical (and projected) data to inform better managerial operating decisions.