Practicing questions for Mangement Accounting and Decision Making

Question 1 A hotel budget for the forthcoming year shows the following room occupancy: Average olo January - March 45 April - June 60 July - September 90 October - December Revenue for the year is estimated to be 3 million and arises from three profit centres: 55 Accommodation* 45%: Restaurant 35%: Bar 20%: Total 100% *The accommodation revenue is earned from several different categories of guest, each of which pays a different rate per room. The three profit centres have the following percentage gross margins: Accommodation Restaurant (%) Bar (%) (%) Revenue 100 100 100 Wages Cost of sales Direct costs 40 84 75 Gross margin 60 16 25 Fixed costs for the year are estimated to be 450 000. Capital employed is 6.5 million. As a means of improving the return on capital employed, two suggestions have been made: i. to offer special two-night holidays at a reduced price of 25 per night. It is ex- pected that those accepting the offer would spend an amount equal to 40% of the accommodation charge in the restaurant, and 20% in the bar. ii. to increase prices. Management is confident that there will be no drop in vol- ume of sales if restaurant prices are increased by 10% and bar prices by 5%. Accommodation prices would also need to be increased. Required a) Calculate the budgeted return on capital employed before tax; (12 marks) b) Calculate i. how many two-night holidays would need to be sold each week in the three off peak quarters to improve the return on capital employed (ROCE) by a further 5% above the percentage calculated in (a) above; (10 marks) ii. by what percentage the prices of accommodation would need to be in- creased to achieve the desired increase in ROCE shown in (b) (i) above; (10 marks) c) Explain briefly the major problems likely to be encountered with each of the two suggestions and recommend which should be adopted, assuming that they are mutually exclusive. (18 marks) Question 1 A hotel budget for the forthcoming year shows the following room occupancy: Average olo January - March 45 April - June 60 July - September 90 October - December Revenue for the year is estimated to be 3 million and arises from three profit centres: 55 Accommodation* 45%: Restaurant 35%: Bar 20%: Total 100% *The accommodation revenue is earned from several different categories of guest, each of which pays a different rate per room. The three profit centres have the following percentage gross margins: Accommodation Restaurant (%) Bar (%) (%) Revenue 100 100 100 Wages Cost of sales Direct costs 40 84 75 Gross margin 60 16 25 Fixed costs for the year are estimated to be 450 000. Capital employed is 6.5 million. As a means of improving the return on capital employed, two suggestions have been made: i. to offer special two-night holidays at a reduced price of 25 per night. It is ex- pected that those accepting the offer would spend an amount equal to 40% of the accommodation charge in the restaurant, and 20% in the bar. ii. to increase prices. Management is confident that there will be no drop in vol- ume of sales if restaurant prices are increased by 10% and bar prices by 5%. Accommodation prices would also need to be increased. Required a) Calculate the budgeted return on capital employed before tax; (12 marks) b) Calculate i. how many two-night holidays would need to be sold each week in the three off peak quarters to improve the return on capital employed (ROCE) by a further 5% above the percentage calculated in (a) above; (10 marks) ii. by what percentage the prices of accommodation would need to be in- creased to achieve the desired increase in ROCE shown in (b) (i) above; (10 marks) c) Explain briefly the major problems likely to be encountered with each of the two suggestions and recommend which should be adopted, assuming that they are mutually exclusive. (18 marks)