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:

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.

b. Calculate the relevant costs associated with the special-order offer.

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).

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.)

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

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).

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