Acrux Group is a multidivisional business established in Hong Kong since the 1980s.

The firm has two major subsidiaries: Plunkett Hotels and Resorts, and Honshu

Properties.

Plunkett Hotels and Resorts is a five-star resort with presence in major tourist

destinations across Asia-Pacific and Australia. Guests pay an all-inclusive flat rate to

enjoy all the services offered by the resort, which includes accommodation, food and

beverages, spa and sauna, and a variety of sport activities organized by the fitness

club. Each service is organized as a department for management purposes. Due to

its excellence services, Plunkett has received numerous awards in the past and it has

been expanded from a single resort hotel to 15 resort hotels.

The General Manager in each Plunkett's resort is treated as a profit centre, and their

annual bonuses is determined based on the difference between actual as compared

to the budgeted profit at year end. In the past, Plunkett's annual budget is based on

the projected occupancy rate and expected costs. The annual budget will then be

divided into monthly budgets based on the number of days in the month and seasonal

demand fluctuations.

During the middle of 2017, Plunkett has changed it's CFO and she felt that the old

budgeting approach does consider the dynamic nature of the tourism market (The

peak season for most of the Plunkett's resort hotels are in the months of January, July,

August and December). To ensure the budget reflects the most updated demand and

cost information, she adopts the rolling budget approach starting from 2018 fiscal year.

Before the fiscal year begins, the head office sets the target, for each resort, the

variable cost per room occupied for each department (i.e. accommodation, food and

beverage, spa, and fitness club), along with the fixed costs target on these

departments for the entire year. Each department's annual fixed cost target will then

be divided into monthly targets based on the number of days.

Under the new budgeting approach, the General Manager of Plunkett's resort is

evaluated using the flexible budget. Bonuses are determined based on the difference

between budgeted and actual expenditures.

The following illustrates the new budget model for Plunkett to be adopted in 2018 for

its Penang resort:

Number of rooms 500

Average daily occupancy rate 75%

Expected daily occupancy 375

Revenue per day per room $1,700

Budgeted revenue / day $ 637,500

Daily variable costs per room

Accommodation $ 70

Food and beverage $ 300

Spa $ 200

Fitness club $ 30

Total daily variable costs / room $ 600

Total variable costs on average

occ upancy $ 225,000

Annual fixed costs

Accommodation $ 88,000,000

Food and beverage $ 18,000,000

Spa $ 1,600,000

Fitness club $ 2,300,000

Maintenance $ 1,700,000

Administration $ 14,000,000

Total annual fixed costs $ 125,600,000

Da ily fixed costs (365 days, rounded) $ 344,110

Daily profit $ 68,390

The actual resort for the Penang resort in August is as follows:

Total number of guest

days 10,540

Revenue per guest day $ 1,700

Variable costs

Accommodation $ 685,100

Food and beverage $ 3,035,520

Spa $ 2,002,600

Fitness club $ 305,660

Fixed costs

Accommodation $ 7,175,013

Food and beverage $ 1,421,753

Spa $ 119,584

Fitness club $ 175,808

Maintenance $ 135,721

Administration $ 1,212,822

After the adoption of the new budgeting system, occupancy rate for Penang resort

from January to August are 80%, 75%, 77%, 70%, 67%, 64%, 67%, 70% respectively.

Another subsidiary of Acrux Group is Honshu Properties. Honshu operates as a

property development business. It mainly owns and operates service apartments in

the Asia Pacific region. Unlike Plunkett Hotels and Resorts, the General Manager of

Honshu Properties is evaluated as an investment centre. Specifically, the general

manager of Honshu is rewarded based on its pre-tax return on assets (ROA). Thus,

the higher its pretax ROA, the more bonus the general manager will enjoy. Currently,

Honshu is considering acquiring a new apartment complex in Thailand known as

Havana Peak with the following information:

Expected revenue $16.6 million

Expected operating expenses $12.59 million

Asset value $20 million

The following are the latest financial information for Honshu in 2018:

Sales $86.5 million

Operating expenses $69.7 million

Total assets $64 million

Acrux estimated that Honshu's minimum rate of return is 15%.

Questions Required:

a. Determine Plunkett Hotel and Resorts breakeven occupancy rate per day.

b. Using the old budgeting system, prepare the August, 2018 budget to determine

the budgeted profit for the Penang resort (Hint: follow the daily budget

illustration for the Penang budget).

c. Prepare a report to evaluate Penang resort's performance under the new

budgeting system for August 2018. Briefly comment on the General Manager's

of Penang resort's performance.

d. After the adoption of the new budgeting system, almost all other hotels in the

Plunkett Hotel and Resorts exhibit occupancy rates trend like the Penang resort.

In fact, they share similar performance trend as in part (c). Discuss possible

explanations for such observation.

e. Determine Honshu's ROA in 2018.

f. Based on the information given, will the General Manager of Honshu Properties

acquire Havana Peak? Explain with supporting computations.

g. If the CFO of Acrux Group had the same information as the General Manager

of Honshu, would the CFO of Acrux willing to invest in Havana Peak? Explain

with supporting computations.

h. What is your recommendation to the CFO of Acrux Group as to the performance

measurement and incentive system of Honshu Properties?