Sunrise Hotels (C)

Recently a commercial laundry service, The Washouse Company, approached you with an offer to clean and fold the hotels linens and towels. Washouse is an established laundry service that does laundry for area hospitals, restaurants, repair shops and a local gym. They will pick up and drop off laundry each weekday with next-day turnaround. The quoted price is $0.32/pound. Sunrise will be billed weekly with payment terms at 7 days after receipt of invoice. Each rental generates 3.5 lbs. of laundry.

Since its founding, all Sunrise Hotels did their own laundry. Each property has a commercial washing machine, dryer and folding machine. Recently you read an article in Hotelier Monthly that extolled the benefits of outsourcing achieved by many full-service hotels.

Your hotel has a washer, dryer, folder (iron) and water treatment equipment with a book value of $25,500. Purchased 4 years ago, the equipment was estimated to have a useful life of ten (10) years. If you outsource the laundry, the equipment can be sold. The salvage value is $4,500.

Space for the laundry room in most properties is obtained by using two guest rooms at the rear of the property. If the laundry is outsourced, the laundry room can be converted to guest rooms. Conversion costs would be about $30,000 for furnishings (bed, drapes, table, television, etc.), fixtures (lights, toilet, shower, etc.) and flooring. Rooms are remodeled every seven (7) years.

Laundry supplies (detergent, bleach, etc.) were estimated using a regression model for all cleaning supplies. You have determined that the variable cost is $0.19/rental. Variable costs for laundry room water, gas and electric were estimated at $0.12/rental. Reviewing financial and operational data you learn that repair costs averaged $4,725 annually over the past five years. The laundry department is supervised by the Head Housekeeper and 25% of her wages have been allocated to the laundry department. The head housekeeper is paid $9.30 per hour and works full-time (2,000 hours annually). The laundry worker is paid $8.06 per hour. The laundry room can process 80 pounds of laundry per hour.

Required

1. Use the relevant cost framework to analyze the outsourcing decision if you expect 60% occupancy. What should you do?
2. Re-do the analysis with the assumption that occupancy remains the same next year.
3. What qualitative factors should be considered?