You have been hired by the general manager (GM) of a budget hotel in Colorado. The hotel is part of a large economy lodging chain in North America. Economy lodging hotels include Super 8, Motel 6 and Days Inn. They are typically small, free-standing hotels with no food and beverage outlets (i.e., restaurants and bars), no conference or banquet facilities, no meeting spaces, and limited services. There is a single output: the provision of rooms for one or more nights. While there are "single" and "double" rooms, differences are minor so there is no need to use weighted-average prices or costs. With a single output, there is one obvious cost driver: the number of rooms rented.

An economy lodging "property" typically has 110 rooms, although size may range from 60 to 175 rooms. Rooms are basic and there are few amenities. Room access is typically from the building's exterior. Like chain restaurants, economy lodging hotels develop standard properties to minimize construction costs.

A typical property is staffed by a GM, five front desk workers, five housekeepers, a head housekeeper, a laundry worker, and a maintenance worker. Wages for all hotel workers other than the GM are at or slightly above the minimum wage; this is the result of high employee turnover and low-skill positions. Recruiting and training costs for employees, other than the GM, are minimal.

The GM has a great deal of autonomy in running the day-to-day operations of the hotel. The GM is supervised by a district manager who typically oversees eight to fifteen properties, visiting each property every four to six weeks. GMs are responsible for pricing (with corporate oversight), local advertising, hiring and terminating hotel staff, selecting local suppliers for unique products or services (e.g., landscaping, snow removal and major repairs), purchasing and maintaining an inventory of standard products (e.g., soap, linens, coffee and cleaning supplies), and conducting sales calls with local businesses. GMs participate in the budgeting process, although the procedure varies somewhat depending on the district manager and the individual manager (i.e., some area managers prefer a top-down approach whereas others support a participative bottom-up approach).

GMs are evaluated using both financial and non-financial metrics. A modest bonus is awarded to GMs who achieve their profit goals for the year. Additional bonuses are awarded for achieving customer satisfaction and internal audit targets. A property's financial targets for the bonus vary depending on local economic conditions and the physical condition of the assets. As with the budgeting process, the district manager may choose to negotiate the target with the GM or simply impose a target of her/his choosing. GMs who do not achieve a minimum, company-wide audit score (also the threshold for the bonus) for three years are to be terminated (despite this requirement, the chief financial officer could not remember this ever happening). The quality target is corporate-wide, but the specific figure depends on the property's age (i.e., newer or renovated properties are held to a higher target than older, more run-down properties). 11

Estimating the Hotel's Cost Function

Next week is the Area Manager's Meeting. Your GM wants to look good in front of her boss, the district managers and other general managers. To begin your analysis, you must estimate the hotel's cost equation. The accounting department provided you with three years (2015-2017) of monthly data. These data consist of the following items:

Rooms available A measure of capacity. Rooms out of service (for repairs) lower this measure.

Rooms rented Number of rooms sold each month (i.e., sales volume)

Rooms revenues Total revenues received for rooms rented.

Other revenues Includes vending machines, Internet access, laundry, etc.

Total revenues The sum of room revenues and other revenues.

Front office Wages for the general manager and the front desk staff.

Housekeeping Wages for housekeepers, housekeeper supervisor and laundry worker.

Other personnel Wages for the maintenance worker, payroll taxes, benefits, etc.

Total personnel The sum of front office, housekeeping and other personnel expenses.

Supplies Expenses related to cleaning supplies, in-room amenities, coffee, etc.

Other expenses All expenses not otherwise classified (e.g., advertising)

Repairs Expenses related to paint, plumbing supplies, electrical supplies, etc.

Energy Expenses for gas, electricity and water.

Other utilities Expenses for trash pickup, cable television, telephone equipment, etc.

Required

1. Identify the cost object (i.e., the dependent, or y variable).

2. Identify the cost driver (i.e., the independent, or x value).

3. Plot the data to assess whether a linear (mixed cost) model is appropriate. Are there any unusual data points that should be removed or transformed?

4. How much data should be used in the cost equation? Must you adjust for inflation?

5. Estimate the cost equation.

6. Evaluate the cost equation.