THE TERMINUS HOTEL (B)

In autumn 2008, the management of the Terminus Hotel negotiates with international tour operators rates and occupancy levels for 2009. As a consequence of the economic crisis, the Marketing Department receives bids whose rates are below the cost data produced by the recently implemented cost accounting system supplied by the Accounting Department.

The Terminus Hotel, a 200-room facility, is located within the city walls of one of the most impressive medieval towns in Southern Europe. At this hotel, historical data and business practice indicate that a minimum number of rooms should be kept vacant to enable preventive maintenance and unexpected repairs (e.g., air conditioning, cable TV, telephone service, furniture, and room illumination). In particular, the golden rule of the reservation policy of the Terminus Hotel establishes that at least five rooms should be vacant until early evening, a measure aimed to cope with last minute problems and demands from clients. By 10 p.m. each night, it is up to the manager on duty to sell the safety level of 2.5% of the total number of rooms.

Due to the uncertain economic and financial situation, the Marketing Department of the Terminus Hotel produced a report in September 2008 that forecasted an average occupation level of 40% during 2009. Prospects of economic recovery and an increasing confidence in international tourism made the Marketing Department foresee that the Terminus Hotel will increase to 60% occupancy level in 2010 and 2011.

During 2009, the accounting data reports that the Terminus Hotel will have 2,500,000 of fixed costs (e.g., depreciation). At the same time, the accounting data establishes the following variable costs per day of occupied room:

Bathroom amenities: 3 Pencil, notepad and candy: 3 Breakfast: 10 Room service: 5 Laundry: 4

Variable cost per day of room occupancy: 25

Management of the Terminus Hotel was particularly proud of these figures. After the disappointing financial results reported for 2007, an aggressive cost-cutting policy had led to dramatic cost decreases, which resulted in the figures reported above. In this respect, the hotel management regarded the recently implemented cost-system to be instrumental in accomplishing the cost-cutting goals.

In November 2008, the Marketing Department received a bid from an international tour operator, Pearson Travel, a long-term customer of the Terminus Hotel. In spite of the decreasing demand for rooms during 2009, the tour operator asked for its regular booking, that is, 10 rooms per day. This bid pleased the Marketing Department and it fitted with its room forecast for this tour operator. Moreover, it constituted a substantial portion of the 40% occupancy level that was set for 2009. In this case, the room rate offered by the tour operator was 90, as consequence of the ongoing financial crisis. After negotiation with the client and consultation with the Accounting Department, the top management of the Terminus Hotel declined the offer and lost Pearson Travel for 2009.

Right after sending the declining e-mail message to Pearson Travel, the Marketing Department received a bid for five rooms from another regular client, a tour operator called Impressa Reisen. As in the case of Pearson Travel, Impressa Reisen kept to its regular bid and did not depart from previous forecasts of the Marketing Department. Consequently, the five-room bid offered by Impressa Reisen constituted a substantial part of the 40% estimation of occupancy level for 2009. This time, the room rate offered by Impressa Reisen was 95. Again, the Accounting Department objected to the room rate and this made the top management turn down the bid. The Terminus Hotel lost Impressa Reisen as a customer for 2009.

REQUIRED ASSIGNMENTS:

Comment on the decision pattern of the management of the Terminus Hotel.