HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 15 properties with an average of 210 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 80%, based on a 365-day year. The average room rate was $190 for a night. The basic unit of operation is the night, which is one room occupied for one night.

The operating income for year 1 is as follows:

HOMESUITES

Operating Income

Year 1

Sales Revenue

Lodging $ 174,762,000

Food & Bev 29,433,600

Miscellaneous. 10,117,800

Total Revenues 214,313,400

Costs

Labor. $61,263,000

Food & Beverage 18,396,000

Miscellaneous 11,957,400

Management 2,505,000

Utilities, etc. 36,000,000

Depreciation 13,500,000

Marketing 10,000,000

Other costs 2,500,000

Total costs 156,121,400

Operating Profit $58,192,000

In year 1, the average fixed labor cost was $405,000 per property. The remaining labor cost was variable with respect to the number of nights. Food and beverage cost and miscellaneous cost are all variable with respect to the number of nights. Utilities and depreciation are fixed for each property. The remaining costs (management, marketing and other costs) are fixed for the firm.

At the beginning of year 2, HomeSuites will open five new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 80%. Management has made the following additional assumptions for year 2:

• The average room rate will increase by 10%.

• Food and beverage revenues per night are expected to decline by 25% with no change in cost.

• The labor cost (both the fixed per property and variable portion) is not expected to change.

• The miscellaneous cost for the room is expected to increase by 30%, with no change in the

  miscellaneous revenues per room.

• Utilities and depreciation costs (per property) are forecast to remain unchanged.

• Management costs will increase by 5%, and marketing costs will increase by 5%.

• Other costs are not expected to change.

Required-1: Using Excel (data provided in an Excel file), prepare a budgeted income statement for year 2. Hint: It will be useful to first calculate all the Year 1 rates/room (for revenues and costs...).

Required-2: Using your analysis to prepare the budgeted income statement for year 2, prepare two additional income statements (also in Excel) under the following two scenarios:

1. 1) Strategy 1: High Price management will work to maintain an average price of $220 per

   night. They realize that this will reduce demand and estimate that the occupancy rate will

   fall to 70% with this strategy.

2. 2) Strategy 2: High Occupancy management will work to increase the occupancy rate by

   lowering the average price. They estimate that with an average nightly rate of $180, they can achieve an occupancy rate of 90%.

All other estimates for year 2 remain the same as before.

Required-3: Once you have completed your 3 budget scenarios, make a recommendation to management (original plans, high price, high occupancy....what makes the most sense and why).

Preferably Requirement 2, thanks!