The Fairmont hotel is looking to add a concierge floor to their hotel. The hotel is 9 floors with the first floor being a restaurant. The upper 8 floors have the exact same layout. There are 320 rooms in the hotel. The owners of the Fairmont are looking at taking out 6 rooms on the top floor and turning them into an amenity room.

In 2003 the hotel had a 85% occupancy rate., their room revenue was $20,100,000. The hotel is hoping to attract an upscale, turn some of their regular clientele onto the Amenity level, and retain all of their old business. This is the estimated Income Statement for the upcoming year. The Amenity floor would be completed and operational by January 1, 2005. (Do not worry about leap year)

Estimated Income Statement for 2004

Rooms Revenue $20,100,000

Payroll $3,015,000

Other Rooms Expenses $1,005,000

Food and Beverage Revenue $6,000,000

Food and Beverage Payroll $1,920,000

Other Food and Beverage Expenses $580,000

Cost of Goods Sold $2,500,000

Telephone Revenue $800,000

Cost of Sales $700,000

Telephone Payroll $300,000

Rental Revenue $1,000,000

Undistributed Operating Expenses

Marketing $2,000,000

Administrative and General $4,000,000

Property and Operation Maintenance $2,000,000

Electric and Water $2,000,000

Fixed Charges

Mortgage $1,000,000

Property Taxes $1,500,000

Insurance $2,000,000

Interest $1,500,000

Depreciation $750,000

Rooms Revenue Predictions for next year include

90% occupancy on floors 2-8

75% occupancy for the ninth floor.

Rooms Payroll and Rooms Other will remain the same percent of Rooms Revenue.

The Room Rate on floors 2-8 will remain the same as last year.

The Rate for the ninth floor will be $110 more per night than the other rooms.

Food and Beverage Revenue is expected to remain the same, but Payroll, COGS and other expenses will all increase by 5% to sustain the extra services that are offered on the ninth floor.

Telephone and Other Income will also same the same as the previous year.

The Hotel has decided to increase its marketing in the beginning of the expansion by $300,000 / year to make sure the operation is successful.

Tax Rate for both years would be 25%

Due to the expansion, the hotel will increase its mortgage by $250,000/ year and its interest by $324,392 / year.

As the hotels General Manager, it is up to your discretion to decide whether or not to pursue the expansion. Give your findings in support for or against proceeding with the upgrades. Show an estimated Income Statement for 2005. For your analysis make sure that you look beyond the first years financial findings.