Q2.

Sun City (SC) is a magnificent new luxury hotel and golf complex in Jersey. To publicise the opening of the complex a prestigious golf tournament has been arranged, where the worlds best golfers will be competing for huge cash prizes. The tournament is scheduled for June 2018. On the first day a Pro-Am tournament will be held, where the professional golfers will play in a competition with hotel guests on a lucky draw basis. The professional tournament will then be held over the following four days.

SC will offer accommodation to the public for each of the five nights of the tournament period.\

The following information is available regarding the tournament period:

1. Hotel:

Total rooms available to the public 2,400 rooms

Room mix:

Double rooms 75% of total rooms

Single rooms 15% of total rooms

Suites 10% of total rooms

Price per room per night:

Double rooms 400

Single rooms 300

Suites 600

Number of guests per room per night:

Double rooms 2

Single rooms 1

Suites 4

When occupied, all rooms will contain the number of guests as indicated above.

Costs:

Variable costs per room per night: Based on a variable cost of 100 per guest per night.

Fixed costs related to accommodation for the five-day period:

Double rooms 516,000

Single rooms and suites (total) 300,000

1. All guest meals, drinks, entertainment etc. are included in the nightly room price.

2. The objective of the hotel management team is to maximise profit.

3. All single rooms and suites are expected to be sold for each of the five nights of the tournament period.

However, the occupancy rate of double rooms depends on the room price. Management is not sure if the double room price should be increased or decreased to maximise occupancy rates. At a price of 400 per room per night they expect to rent out 1,440 double rooms. Experience in the hotel industry has shown that, for each 10 increase/decrease in the double room price, the expected number of rooms to be let out decreases/increases by 40 rooms.

4. Management also knows that the relationship between double room prices and quantities demanded is expressed by the following straight line demand equation:

P = a bQ

Where:

P = The room price per night

a = The price at which no rooms will be demanded

b = The slope of the demand line

Q = The quantity (number) of double rooms demanded

5. The formula to determine the amount of marginal revenue (MR) earned by renting out one extra double room is:

MR = a 2bQ

(i.e. a and Q have the same values as per the Pricing formula above, and the value of b per the above formula is doubled).

Required:

1. Calculate the fee per night that SC should charge for double rooms during the tournament, to ensure that the maximum revenue is obtained from double rooms.
2. Based on the double room quantities and price calculated in (a) above, and the other cost and revenue information provided, calculate the profit that will be earned from the tournament.

3. Explain the pricing term complementary pricing, and give an example of how SC might use this pricing policy (incorporating room prices) to increase the profit from the tournament.
4. Identify and briefly discuss three other non-pricing initiatives that SC might use to further improve the profit from staging the golf tournament.