St. Ashton Maui Resort St. Ashton Resorts operates high-end, all-inclusive vacation destinations in 12 locations, including Maui, Hawaii; Los Cabos, Mexico; and the Great Barrier Reef, Australia. At St. Ashton properties, the guest pays a flat daily rate that includes lodging, all meals and beverages, golf, and spa treatments. Each resort is treated as a profit center, and the managers of the resort receive bonuses for achieving or beating the budget. Under the profit center approach, each resort management team is rewarded based on the difference between budgeted and actual profits. Last year, St. Ashton switched its budgeting methodology. Previously, the CFO's office of St. Ashton set each property's annual budget based on the projected occupancy rate and expected costs. The annual budget was then broken down into monthly budgets adjusted for the number of days in the month and any seasonal fluctuation in the occupancy rate. The new CFO, hired in the middle of last year, felt the old budget approach, which was set before the year began, did not take into account the dynamic nature of the tourism market. Travelers used to plan their leisure travel 6-9 months ahead, which allowed resorts to develop reasonably accurate forecasts of demand and hence accurate budgets. The Internet and global markets caused the oncepredictable demand to become more unpredictable. The old budget was out of date shortly after the new year began, causing managers rewarded under the budget great consternation. The new CFO changed the budgeting system for the current fiscal year to a monthly rolling model. Before the current fiscal year began, the CFO's office sets the spending targets per guest room occupied for each department in each resort (lodging, food and beverage, golf, and spa) as well as annual budgets to cover each department's fixed costs. The annual departmental budgets are converted to monthly budgets by taking the annual budget, dividing it by 365, and multiplying that by the number of days in the month. The following table illustrates the new budget model for the St. Ashton Maui Resort for the current year. Budget Revenue per room day $1,700 Number of rooms 500 Average occupancy rate 75% Expected occupancy 375 Total expected revenue per day $637,500 Variable costs per room Food and beverage $300 Golf $30 Spa $200 Lodging $70 Total variable cost per room day $600 Total expected variable cost @ average occupancy $225,000 Fixed cost per year Food and beverage $18,000,000 Golf $2,300,000 Spa $1,600,000 Lodging $88,000,000 Administration $14,000,000 Grounds $1,700,000 Total annual fixed cost $125,600,000 Total annual fixed cost per day (365 days) $344,110 Total profit per day $68,390 Final PDF to printer 270 Chapter 6 zim6455X_ch06_216-279.indd 270 11/20/15 08:30 PM Required: a. What is the St. Ashton Maui Resort's break-even occupancy rate? b. Prepare the St. Ashton Maui Resort monthly budget for October (with 31 days) for the current year before the current year begins. c. To evaluate and reward the performance of the St. Ashton Maui managers under the new budget model, St. Ashton uses the actual number of guest days in the month, the budgeted variable costs per room, and budgeted fixed costs to establish what the target expenses for the month should have been. This is then compared to the actual expenses incurred. Managerial bonuses are paid based on the difference between the target and the actual expenses. For October of the current year, the St. Ashton Maui had 10,500 guest days at $1,700 per day and reported the following revenues and expenses: Actual results for October Guest days 10,540 Revenue $17,918,000 Variable costs Food and beverage $ 3,035,520 Golf 305,660 Spa 2,002,600 Lodging 685,100 Total variable costs $ 6,028,880 Fixed costs Food and beverage $ 1,421,753 Golf 175,808 Spa 119,583 Lodging 7,175,013 Administration 1,212,821 Grounds 135,720 Total fixed cost $10,240,701 Prepare the performance report of the St. Ashton Maui Resort for October that compares actual to budgeted results. d. Based on the performance report you prepared in part (c), briefly evaluate the performance of the St. Ashton Maui Resort management team. e. In reviewing the performance of the St. Ashton Maui Resort since the beginning of the current year, St. Ashton's CFO noticed that while favorable cost variances have resulted in most months, an alarming trend in occupancy rates is emerging: Jan Feb Mar Apr May Jun Jul Aug Sept Oct 79% 74% 76% 72% 73% 74% 69% 70% 67% 68% The St. Ashton Maui Resort managers attribute the falling occupancy rate to new luxury resorts opening in the Hawaiian Islands. However, similar trends in cost variances and occupancy rates exist at other St. Ashton resorts where the budgeting system has been changed to the system used at the St. Ashton Maui Resort. Discuss possible reasons for the declining occupancy rate at the St. Ashton Maui resort.