Integrative Exercise Relevant Analysis, Cost-Based Pricing, Cost Behavior, and Net Present Value Analysis for Superior Stay Resorts

Special-Order Offer Relevant Analysis

Superior Stay Resorts provides luxurious hotel accommodations to its high-end customer base. Superior measures business volume by the total number of occupied guest room nights during the year. For each of the past several years, Superior's sales have been considerably less than the expected annual volume of 1,200,000 total guest room nights. Therefore, the company ends each year with significant unused capacity. Given its high-fixed cost structure, Superior's profitability hinges on increasing the number of occupied guest room nights (i.e., decreasing unused capacity) throughout the year. As a result, Superior's Controller, Jack, has decided to seek out potential special-order offers from other companies. Superior's top propertyPremier Resortsits adjacent to an expansive outdoor event spaceThe Barnyardthat hosts large festivals, music concerts, boat and RV shows, rodeos, fairs, and various other athletic competitions. Superior received an offer from Barnyard's management to rent 10,000 Premier Resort guest rooms for its December event attendees at a price of $130 per guest room. Jack was excited, noting that, "This is a great way for us to make use of one of our most premier properties!".

The annual costs incurred by Superior to fulfill 1,000,000 occupied guest room nights are as follows:

Line Item Description	Amount
Variable costs per occupied guest room night:
Direct materials (e.g., specialized shampoos, slippers, lotions, candles, etc.)	$25
Variable service overhead (e.g., marble floor polish)	$30
Sales commissions	$50
Direct housekeeping labor (e.g., room cleaning)	$70
Total fixed costs:
Advertising	$ 1,500,000
Property lease and insurance	$ 4,500,000
Facility inspection	$10,000,000
Customer service online platform	$ 800,000
Landscaping	$ 1,200,000

In addition, Jack met with several of Superior's key service area managers and discovered the following additional information:

The special-order could be fulfilled without incurring any additional marketing or customer service costs.

Superior leases the Premier Resort through a multiyear contract that was renewed at the beginning of the current year.

Superior incurs costs to meticulously inspect the cleanliness and structural integrity of its facilities at particular intervals based on the current number of occupied guest rooms for the year. The total room inspection costs shown in the previous table represent 500 inspections during the year.

Barnyard requires that its Safety Committee visit and approve any hotel facility to which it sends its customers. The Safety Committee only conducts its approval the first time it uses a particular facility. The terms of the special-order offer would require Superior bear the $150,000 cost of the Safety Committee's approval visit.

Finally, Jack wants to utilize a predictive data analytics perspective (Refer to Exhibit 2.2) to conduct the various analyses needed to properly evaluate Barnyards special-order offer and decide whether to accept or reject it.

Required:

1. Conduct a relevant analysis of the special-order offer by calculating the following:

To assist Jack, create a model (i.e., formula) with the relevant revenues and relevant costs (i.e., the independent variables) to use in forecasting the relevant profit (i.e., the dependent variable) that would result if Superior were to accept the special-order offer. To help develop your model, complete the following table including the details of your model inputs (use as many bullet points as necessary).

a. Select the independent variables (without dollar amounts) in your model:

Special-order sales revenueDirect materials costVariable service overhead costDirect housekeeping labor costFacilities inspection costSafety approval visit costAll of the above choices.

b. If Superior were to accept the special-order offer which variable is included in your model:

Special-order sales revenueDirect materials costVariable service overhead costDirect housekeeping labor costFacilities inspection costSafety approval visit costAll of the above choices.

c. Using your variables from requirement 1a, select out your model:

Relevant profit = Special-Order Relevant Sales Revenues + Special-Order Relevant CostsRelevant profit = Special-Order Relevant Sales Revenues x Special-Order Relevant CostsRelevant profit = Special-Order Relevant Sales Revenues - Special-Order Relevant Costs

2. Create a spreadsheet that contains the model inputs you included in your completed table (from Requirement 1). Using your spreadsheet.

a. Calculate the relevant revenues associated with the special-order offer. fill in the blank 1 of 1$

b. Calculate the relevant costs associated with the special-order offer. fill in the blank 1 of 1$

c. Select your model (from Requirement 1c) and calculate the relevant increase or decrease in profit associated with the special-order offer (Enter loss, if any, as negative amount).

Relevant revenuesRelevant costsRelevant decrease in profit

fill in the blank 1 of 1$

3. Based solely on financial factors, explain why Superior should accept or reject Barnyard's special-order offer.

The relevant cost is fill in the blank 1 of 3

greaterlesser

than the relevant revenue offered by Barnyard, making the relevant (or incremental) profit of fill in the blank 2 of 3

negativepositive

so, fill in the blank 3 of 3

rejectaccept

4. Describe at least one qualitative factor that Superior should consider, in addition to the financial factors, in making its final decision regarding the acceptance or rejection of the special-order offer. Reputation of their overall brand represents a potentially important qualitative factor for Superior to consider. In particular, some (possibly a large) percentage of Superior's loyal high-end customers might lower their perception of Superior's overall

brand reputationbrand designbrand quality

, exclusivity, or overall level of luxury if they learned that Superior was renting its Premier Resort at a price that likely is well below the typical Superior room rate. As a result, the acceptance of Barnyard's special-order offer might significantly decrease Superior's occupied room volume and/or room revenue from its regular high-end customers.

Cost-Based Pricing

Assume for Requirements 5 through 8 that Superior rejected Barnyard's special-order offer because the $130 price suggested by Barnyard was too low. In response to the rejection, Barnyard asked Superior to determine the price at which it would be willing to accept the special-order offer. For most special-order inquiries, Superior employs a pricing method whereby price is set by marking up relevant variable costs by 40%.

5. To assist Jack, create a spreadsheet containing a model (or formula) with the costs (i.e., the independent variables) to use in forecasting the unit guest room price (i.e., the dependent variable) that Superior should charge Barnyard according to its pricing method. Complete the following table with the details of your model (use as many bullet points as necessary).

a. Select the independent variables (without dollar amounts) in your model:

Direct materialsVariable service overheadDirect housekeeping laborAll of the above choices.

b. If Superior were to accept the special-order offer which variable is included in your model:

Direct materialsVariable service overheadDirect housekeeping laborAll of the above choices.

c. Using your variables from Requirement 5a, write out your model:

Unit Guest Room Price = Unit Relevant Variable Cost + (1.40)Unit Guest Room Price = Unit Relevant Variable Cost x (1.40)Unit Guest Room Price = Unit Relevant Variable Cost - (1.40)

6. Create a spreadsheet that contains the model inputs you included in your completed table (from Requirement 5). Using your spreadsheet and Superior's 40% markup pricing method for Barnyard's special-order offer, create a model that calculates the unit guest room price that Superior should charge Barnyard to rent each guest room if it sets the special-order sales price by using its markup pricing method. (Hint: Refer to the relevant costs that you calculated in response to Requirement 2b.) fill in the blank 1 of 1$ unit guest room price

7. Now create another model that calculates the relevant increase or decrease in profit associated with the special-order offer. fill in the blank 1 of 1$

8. Based solely on financial factors, explain why Superior should accept or reject the special-order offer if it uses its markup pricing method to set the special-order sales price.

The relevant cost incurred is fill in the blank 1 of 4

less thangreater than

the relevant revenue of that fill in the blank 2 of 4

wouldwould not

be generated from Barnyard, making the relevant (or incremental) profit of positive. Therefore, Superior fill in the blank 3 of 4

shouldshould not

accept the special-order offer if Barnyard fill in the blank 4 of 4

willwill not

agree to pay that results from Superiors cost-plus pricing method.

Incorporating a Long-Term Horizon into the Decision Analysis

Assume for Requirement 9 that Jack's relevant analysis reveals that Superior would earn a positive relevant profit of $500,000 from the special-order. However, after conducting this traditional, short-term analysis, Jack wonders whether it might be more profitable over the long term to downsize the company by reducing its service capacity (i.e., its total guest room night capacity). He is aware that downsizing requires a multiyear time horizon because companies usually cannot increase or decrease fixed assets (such as properties) every year. Therefore, Jack has decided to use a 5-year time horizon in his long-term decision analysis. He has identified the following information regarding capacity downsizing:

Superior Stay Resorts consists of many luxurious properties (i.e., hotels). If it chooses to downsize its capacity, Superior can immediately sell a set of properties for $1,275,000.

Also, if it chooses to downsize its capacity, Superior's annual property lease and insurance cost will decrease from $4,500,000 to $4,200,000.

Therefore, Jack must choose between the following two alternatives:

Accept the special-order offer each year and earn a $500,000 relevant profit for each of the next 5 years (i.e., the ongoing special-order alternative), or

Reject the special-order offer and downsize as described above (i.e., the downsizing alternative).

9. Assume that Superior pays for all costs with cash. Also, assume that a 10% discount rate, a 5-year time horizon, and all cash flows occur at the end of the year. Using an NPV approach to discount future cash flows to present value

a. Create a model that calculates the NPV of accepting the special-order offer with the assumed positive relevant profit of $500,000 per year (i.e., the special-order offer alternative). fill in the blank 1 of 1$ NPV

b. Create a model that calculates the NPV of downsizing capacity as previously described (i.e., the downsizing alternative). fill in the blank 1 of 1$ NPV

c. Based on the NPV outputs of the models you created for Requirements 9a and 9b, identify and explain which of these two alternatives is best for Superior to pursue in the long term.

Based on the NPV of requirements 9a and 9b, the

downsizingspecial sales

alternative (i.e., Requirement 9b) appears to be the best long-term alternative for Superior to pursue because it is estimated to provide a

larger positive NPVlarger negative NPV

.