Part $1$

The Sanford Hotels chain embarked on a new customer loyalty program for the year. The year$-$end data have been collected, and it is now time for you to determine whether the loyalty program should be continued, discontinued, or perhaps altered to improve loyalty and profitability levels at Sanford. Sanford's loyalty program consists of three different customer loyalty levels. Following are some characteristics of the hotel chain and its loyalty programs.

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Note that an average Gold Customer would have received the $15\%$ discount for his or her first $15$ stays, received the $20\%$ discount for the next $35$ stays, and the $30\%$ discount only for the last $10$ nights. Assume that all program members signed on to the program the first time they stayed with one of the chain's hotels. Also, assume the restaurants are managed by a $100\%-$owned subsidiary of Sanford.

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Part $1$

Requirement $1.$ Calculate the program contribution margin for each of the three programs, as well as for the group of customers not subscribing to the loyalty program. Which program is the most profitable? Which is the least profitable? Do not allocate fixed costs to individual rooms or specific loyalty programs. $($Round percentages to two decimal places.$)$

Loyalty Program

Total Revenue

Variable Costs

Contribution Margin

Contribution Margin $/$ Total Revenue $(\%)$

Gold

Silver

Bronze

No program

Total

Part $2$

The group of customers with the highest contribution margin per revenue dollar is the

bronze program group.

silver program group.

gold program group.

no$-$program group.

The group of customers with the lowest contribution margin per revenue dollar is the

bronze program group.

silver program group.

gold program group.

no$-$program group.

Part $3$

Requirement $2.$ Develop an operating income statement for Sanford for the year ended December $31.$

Revenue

Variable costs

Contribution margin

Fixed costs

Operating income

Part $4$

Requirement $3.$ What is the average room rate per night? What are average variable costs per night inclusive of the loyalty program? $($Round your answers to the nearest cent.$)$

What is the average room rate per night?

Part $5$

What is the average variable costs per night, inclusive of the loyalty program?

Part $6$

Requirement $4.$ Explain what drives the profitability $($or lack thereof$)$ of the most and least profitable loyalty programs $($again$,$ one of these may be the $"$no program" option$).$

The loyalty programs are designed to attract a high number of

first time customers.

repeat business customers.

Given the low variable costs, increasing the number of stays at their hotels will

still increase the overall operating income.

decrease the overall operating income.

This is true

despite the lower contribution margin per revenue dollar.

due to the higher contribution margin per revenue dollar.

The group of customers with the highest contribution margin per revenue dollar is theThe group of customers with the lowest contribution margin per revenue dollar is theThe group of customers with the lowest contribution margin per revenue dollar is theThe loyalty programs are designed to attract a high number ofGiven the low variable costs, increasing the number of stays at their hotels willGiven the low variable costs, increasing the number of stays at their hotels willThis is trueThis is true

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Characteristics

All new customers can sign up for the Sanford Bronze Cardlong dashthis card provides guests with a complimentary bottle of wine $($cost to the chain is $ $6$ per bottle$),$ $ $24$ in restaurant coupons $($cost to the chain is $ $12),$ and $15\%$ off the nightly rate. The program enables the chain to track a member's stays and activities. Once a customer has stayed and paid for $15$ nights at any of the chain's locations worldwide, he or she is upgraded to Silver Customer status. Silver benefits include the bottle of wine $($cost to the chain is $ $6$ per bottle$),$ $ $30$ in restaurant coupons $($cost to the chain is $ $15),$ and $20\%$ off every night from the twenty$-$first night on$.$ A customer who reaches the $50-$night level is upgraded to Gold Customer status. Gold status increases the nightly discount to $30\%$ and replaces the $ $6$ bottle of wine with a bottle of champagne $($cost to the chain is $ $25$ per bottle$).$ As well, $ $40$ in restaurant coupons are granted $($cost to the chain is $ $20).$ The average full price for one night's stay is $ $220.$ The chain incurs variable costs of $ $60$ per night, exclusive of loyalty program costs. Total fixed costs for the chain are $ $120$ comma $520$ comma $000.$ Sanford operates $8$ hotels with, on average, $600$ rooms each. All hotels are open for business $365$ days a year, and approximately average occupancy rates are around $80\%.$ The following are some of the statistics on the loyalty programs.

Loyalty Program

Number of Customers

Average Number of Nights per Customer

Gold

$2,836$

$60$

Silver

$8,559$

$30$

Bronze

$85,760$

$10$

No program

$212,900$

$1$

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Required

Calculate the program contribution margin for each of the three programs, as well as for the group of customers not subscribing to the loyalty program. Which program is the most profitable? Which is the least profitable? Do not allocate fixed costs to individual rooms or specific loyalty programs.

Develop an operating income statement for Sanford for the year ended December $31.$

What is the average room rate per night? What are average variable costs per night inclusive of the loyalty program?

Explain what drives the profitability $($or lack thereof$)$ of the most and least profitable loyalty programs $($again$,$ one of these may be the $"$no program" option$).$

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