same case attachment..majestic lodge Question 3---what is the contribution margin per occupied room/day during off season? Question 4---for each alternative what is the occupency rate to break-even?
Colin Drury, Management and Cost Accounting - Majestic Lodge 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 for the off-season to be between 20% and 40% for the next few years. Kacheck estimates that with 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. The manager's salary is paid over 12 months. He acts as a caretaker of the facilities during the offseason 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.Kacheck 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 Colin Drury, Management and Cost Accounting - Majestic Lodge 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 $15,000 Manager's Wife 2,400 Desk Clerk 2,880 Maids (four) 7,200 $27,480 Payroll Taxes and Fringe Benefits Depreciation (15 year life) 5,496 30,000 Property Taxes 4,000 Insurance 3,000 Repairs and Maintenance 17,204 Cleaning Supplies 1,920 Utilities 6,360 Linen Service 13,920 Interest on Mortgage (5% interest rate) 21,716 Miscellaneous Expenses 7,314 Total Expenses 138,410 Profit before Federal Income Taxes $22,390 Federal Income Taxes (48%) Net Profit 10,747 $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. 3. What is the incremental contribution margin per occupied room/day during the off-season? 4. For each decision alternative calculate the occupancy rate necessary to break even on the incremental annual expenses. 5. What alternative do you recommend? Why? Colin Drury, Management and Cost Accounting - Majestic Lodge 6. Evaluate the profitability of the Lodge as an investment for its owners. Does this affect your answer to question 5? 7. Do you have any recommendations for the owners? * This case is adapted by Professor John Shank of the Amos Tuck School, with permission, from an earlier version written by Professor Felix Kollaritsch of the Ohio State University. 8356514 PFA Q:-What is the annual expense for each alternative? (number 2 from the attachment is to be answered) ============================ Show work / Give reasons ANSWER: The annual expenses that is incremental to that decision alternative but are not related to the room/days occupied are shown as under: Hence, manager's wife expense, maid four expenses, insurance expenses, repairs & maintenance and telephone expense have not been consider for they are dependent on room/days occupied. OPTION 1: Stay open, No advertisement, No pool There is no such incremental expenses under this options which are not related to the rom/days occupied. OPTION 2: Stay open, Advertisement, No pool Advertisement 4000 OPTION 3: Stay open, No Advertisement, Pool Only Depreciation 5000 Lifeguard 4800 Insurance & Taxes 1200 Maintenance 1800 Heating Cost 750 Total 13550 OPTION 4: Stay open, Advertisement, Pool Only (500*8) Depreciation 5000 Advertisement 4000 Lifeguard 4800 Insurance & Taxes 1200 Maintenance 1800 Heating Cost 750 Total 17550 OPTION 5: Stay open, No Advertisement, and Pool & Bubble Bubble 3000 Depreciation 5000 Lifeguard 4800 Insurance & Taxes 1200 Maintenance 1800 Heating Cost 750 Total (15000/5) 16550 OPTION 6: Stay open, Advertisement, Pool & Bubble Bubble 3000 Depreciation 5000 Advertisement 4000 Lifeguard 4800 Insurance & Taxes 1200 Maintenance 1800 Heating Cost 750 Total 20550 (15000/5)
