Management Accounting course

Please Just answer the last four questions.

Majestic Lodge* This case was originally set in the 1960's in rural Vermont. The Majestic Lodge is an old, but well maintained property that has changed ownership several times over the years. It has no restaurant or bar. It is positioned as a mid-price good quality "destination" resort lodge The Majestic Lodge is open during the skiing season. It opens on December 2 and closes the last day of March. The ski mountain it serves operates on a permit from the state which allows only 120 days of operation per year. Each of the 50 rooms in the east wing rents for $15 for single occupancy or $20 for double occupancy. The west wing of the lodge has 30 rooms, all of which have spectacular views of the skiing slopes, the mountains, and the village. Rooms in this wing rent for $20 and $25 for single or double occupancy, respectively. The average occupancy rate during the season is about 80% (typically, the Lodge is full on weekends and averages 50 to 60 rooms occupied on week nights.) The ratio of single versus double occupancy is 2:8, on average Operating results for the last fiscal year are shown in Exhibit 1. Mr. Kacheck, the manager of the lodge, is concerned about the off-season months, which show losses each month and reduce the high profits reported during the season He has suggested to the owners, who acquired the lodge only at the end of the 1999 season, that to reduce the off season losses, they should agree to keep the west wing of the lodge operating year-round. He estimates the average occupancy rate careful attention to the off-season clientele a 40% occupancy rate for the 30 rooms during the off-season would be much more likely if the owners would commit $4,000 for advertising each year ($500 for each of 8 months). There is no evidence to indicate that the 2:8 ratio of single vs. doubles would be different during the remainder of the year or in the future. Rates, however, would have to be drastically reduced. Present plans are to reduce them to $10 and $15 for singles and doubles for the off-season to be between 20% and 40% for the next few years. Kacheck estimates that with The manager's salary is paid over 12 months. He acts as a caretaker of the facilities during the off-season and also contracts most of the repair and maintenance work during that time. Using the west wing would not interfere with this work, but would cause an estimated additional $2,000 per year for repair and maintenance Mrs. Kacheck is paid $20 a day for supervising the maids and helping with check-in. During the season, she works 7 days a week. The regular desk clerk and each maid are paid on a daily basis at the rate of $24 and $15 respectively The payroll taxes and other fringe benefits are about 20% of the payroll. Although depreciation and property taxes would not be affected by the decision to keep the west wing open, insurance would increase by $500 for the year During the off-season, it is estimated that Mr. and Mrs. Kacheck could handle the front desk without an additional person. Mrs. Kacheck would, however, be paid for 5 days a week. The cleaning supplies and half of the miscellaneous expenses (room supplies) are considered a direct function of the number of rooms occupied. The other half of the miscellaneous expenses are fixed and would not change with 12 month operation. Linen is rented from a supply house and the cost also depends on the number of rooms occupied but is twice as much, on average, for double occupancy as for single occupancy. The utilities include two items: telephone and electricity. There is no electricity expense with the lodge closed. With the lodge operating, electricity expense is a function of the number of rooms available to the public. Rooms must either be heated or air-conditioned The telephone bills for each of the four seasonal months were as follows 80 Telephones $3.00/month Basic Service Charge $240 50 $290 During the off-season, only the basic service charge is paid. The monthly charge of $3 is applicable only to active telephones. An additional aspect of Mr. Kacheck's proposal is that a covered and heated swimming pool be added to the lodge Mr. Kac heck believes that this would increase the probability that the off-season occupancy rate would be above 30% Precise estimates are impossible. It is felt that although the winter occupancy rate will not be greatly affected by adding an indoor pool, eventually such a pool will have to be built to stay even with the competition. The cost of such a pool is estimated to be $40,000. This amount could be depreciated over 5 years with no salvage value ($15,000 of the $40,000 is for a plastic bubble and the heating units, which would be used nine months of the year). The only other costs associated with the swimming pool are $400 per month for a lifeguard, required by law during the busy hours, additional insurance and taxes, estimated to be $1,200; heating cost of $1,000; and a yearly maintenance cost of $1,800. If the pool were covered, a guard would be needed for 12 months. If it is not covered, a guard would be needed only for 3 summer months (from 15 June to 15 September, the warmest period of the year), and there would be no heating expense EXHIBIT 1 Majestic Lodge Operating Statement, For the Fiscal Year ended 3/31/00 Revenues $160,800 Expenses Salaries Manager Manager's Wife Desk Clerk Maids (four) Payroll Taxes and Fringe Benefits Depreciation (15 year life) Property Taxes Insurance Repairs and Maintenance Cleaning Supplies Utilities Linen Service Interest on Mortgage (5% interest rate) Miscellaneous Expenses $15,000 2,400 2,880 7.200 $27,480 5,496 30,000 4,000 3,000 17,204 1,920 6,360 13,920 21,716 7,314 Total Expenses Profit before Federal Income Taxes 38,41 $22,390 10,747 Federal Income Taxes (48%) Net Profit $11,643 Assignment questions 1. List all the relevant decision alternatives in Mr. Kacheck's proposal 2. For each alternative from question 1, list the annual expenses that are incremental to that decision alternative but are not related to the room/days occupied What is the incremental contribution margin per occupied room/day during the off-season? For each decision alternative calculate the occupancy rate necessary to break even on the 3. 4. incremental annual expenses What alternative do you recommend? Why? Evaluate the profitability of the Lodge as an investment for its owners. Does this affect your answer to 5. 6. question 5? 7. Do you have any recommendations for the owners