Special-Order Relevant Analysis

Superior Stay Resorts provides luxurious hotel accommodations to its high-end customer base. Superior measures business volume by the total number of occupied guest room nights during the year. For each of the past several years, Superior's sales have been considerably less than the expected annual volume of 1,200,000 total guest room nights. Therefore, the company ends each year with significant unused capacity. Given its high-fixed cost structure, Superior's profitability hinges on increasing the number of occupied guest room nights (i.e., decreasing unused capacity) throughout the year. As a result, Superior's Controller, Jack, has decided to seek out potential special-order offers from other companies. Superior's top propertyPremier Resortsits adjacent to an expansive outdoor event spaceThe Barnyardthat hosts large festivals, music concerts, boat and RV shows, rodeos, fairs, and various other athletic competitions. Superior received an offer from Barnyard's management to rent 10,000 Premier Resort guest rooms for its December event attendees at a price of $130 per guest room. Jack was excited, noting that, "This is a great way for us to make use of one of our most premier properties!".

The annual costs incurred by Superior to fulfill 1,000,000 occupied guest room nights are as follows:

Variable costs per occupied guest room night:
Direct materials (e.g., specialized shampoos, slippers, lotions, candles, etc.)	$25
Variable service overhead (e.g., marble floor polish)	$30
Sales commissions	$50
Direct housekeeping labor (e.g., room cleaning)	$70
Total fixed costs:
Advertising	$ 1,500,000
Property lease and insurance	$ 4,500,000
Facility inspection	$10,000,000
Customer service online platform	$800,000
Landscaping	$ 1,200,000

In addition, Jack met with several of Superior's key service area managers and discovered the following additional information:

• The special-order could be fulfilled without incurring any additional marketing or customer service costs.
• Superior leases the Premier Resort through a multiyear contract that was renewed at the beginning of the current year.
• Superior incurs costs to meticulously inspect the cleanliness and structural integrity of its facilities at particular intervals based on the current number of occupied guest rooms for the year. The total room inspection costs shown in the previous table represent 500 inspections during the year.
• Barnyard requires that its Safety Committee visit and approve any hotel facility to which it sends its customers. The Safety Committee only conducts its approval the first time it uses a particular facility. The terms of the special-order offer would require Superior bear the $150,000 cost of the Safety Committee's approval visit.

Finally, Jack wants to utilize a predictive data analytics perspective (Refer toExhibit 2.2) to conduct the various analyses needed to properly evaluate Barnyard's special-order offer and decide whether to accept or reject it.

Required:

1. To assist Jack, you will need a model (i.e., formula) with the relevant revenues and relevant costs (i.e., the independent variables) to use in forecasting the relevant profit (i.e., the dependent variable) that would result if Superior were to accept the special-order offer. To help develop your model, complete the following table including the details of your model inputs (use as many bullet points as necessary).

a)	List the independent variables (without dollar amounts) in your model:
b)	Briefly explainwhy each variable is included in your model:
c)	Using your variables from requirement 1a, write out yourmodel: Relevant profit =

2. Needed: a spreadsheet that contains the model inputs you included in your completed table (from Requirement 1). Using your spreadsheet.

• Calculate therelevant revenues associated with the special-order offer.
• Calculate therelevant costs associated with the special-order offer.
• Enter your model (from Requirement 1c) and calculate therelevant increase or decrease in profit associated with the special-order offer.

3.

• Based solely on financial factors, explain why Superior should accept or reject Barnyard's special-order offer.

4.

• Describe at least one qualitative factor that Superior should consider, in addition to the financial factors, in making its final decision regarding the acceptance or rejection of the special-order offer.

Cost-Based Pricing

Assume for Requirements 5 through 8 that Superior rejected Barnyard's special-order offer because the $130 price suggested by Barnyard was too low. In response to the rejection, Barnyard asked Superior to determine the price at which it would be willing to accept the special-order offer. For most special-order inquiries, Superior employs a pricing method whereby price is set by marking up relevant variable costs by 40%.

5.

• To assist Jack, you will need a spreadsheet containing a model (or formula) with the costs (i.e., the independent variables) to use in forecasting the unit guest room price (i.e., the dependent variable) that Superior should charge Barnyard according to its pricing method. Complete the following table with the details of your model (use as many bullet points as necessary).

a)	List the independent variables (without dollar amounts) in your model:
b)	Briefly explainwhy each variable is included in your model:
c)	Using your variables from Requirement 5a, write out yourmodel: Unit guest room price =

6.

• Needed: a spreadsheet that contains the model inputs you included in your completed table (from Requirement 5). Using your spreadsheet and Superior's 40% markup pricing method for Barnyard's special-order offer, you will need a model that calculates theunit guest room price that Superior should charge Barnyard to rent each guest room if it sets the special-order sales price by using its markup pricing method. (Hint: Refer to the relevant costs that you calculated in response to Requirement 2b.)

7.

• Needed: another model that calculates therelevant increase or decrease in profit associated with the special-order offer.

8.

• Based solely on financial factors, explain why Superior should accept or reject the special-order offer if it uses its markup pricing method to set the special-order sales price.

Incorporating a Long-Term Horizon into the Decision Analysis

Assume for Requirement 9 that Jack's relevant analysis reveals that Superior would earn a positive relevant profit of $500,000 from the special-order. However, after conducting this traditional, short-term analysis, Jack wonders whether it might be more profitable over the long term to downsize the company by reducing its service capacity (i.e., its total guest room night capacity). He is aware that downsizing requires a multiyear time horizon because companies usually cannot increase or decrease fixed assets (such as properties) every year. Therefore, Jack has decided to use a 5-year time horizon in his long-term decision analysis. He has identified the following information regarding capacity downsizing:

• Superior Stay Resorts consists of many luxurious properties (i.e., hotels). If it chooses to downsize its capacity, Superior can immediately sell a set of properties for $1,275,000.
• Also, if it chooses to downsize its capacity, Superior's annual property lease and insurance cost will decrease from $4,500,000 to $4,200,000.

Therefore, Jack must choose between the following two alternatives:

• (a)
• Accept the special-order offer each year and earn a $500,000 relevant profit for each of the next 5 years (i.e., the ongoing special-order alternative),or
• (b)
• Reject the special-order offer and downsize as described above (i.e., the downsizing alternative).

9.

• Assume that Superior pays for all costs with cash. Also, assume that a 10% discount rate, a 5-year time horizon, and all cash flows occur at the end of the year. Using an NPV approach to discount future cash flows to present value
  • Needed: a model that calculates the NPV ofaccepting the special-order offer with the assumed positive relevant profit of $500,000 per year (i.e., the special-order offer alternative).
  • Needed: a model that calculates the NPV ofdownsizing capacity as previously described (i.e., the downsizing alternative).
  • Based on the NPV outputs of the models you created for Requirements 9a and 9b, identify and explain which of these two alternatives is best for Superior to pursue in the long term.