5. THE LEVER HOTEL
The Lever Hotel is situated in a major city close to many theatres and restaurants.
The Lever Hotel has 25 double bedrooms, and it charges guests $180 per room per night, regardless of single or double occupancy. The hotel's variable cost is $60 per occupied room per night.
The Lever Hotel is open for 365 days a year and has a 70% budgeted occupancy rate. Fixed costs are budgeted at $600,000 a year and accrue evenly throughout the year.
During the first quarter (Q1) of the year the room occupancy rates are significantly below the levels expected at other times of the year with the Lever Hotel expecting to sell 900 occupied room nights during Q1. Options to improve profitability are being considered, including closing the hotel for the duration of Q1 or adopting one of two possible projects as follows:
Project 1 – Theatre package
For Q1 only the Lever Hotel management would offer guests a 'theatre package'. Couples who pay for two consecutive nights at a special rate of $67·50 per room night will also receive a pair of theatre tickets for a payment of $100. The theatre tickets are very good value and are the result of long negotiation between the Lever Hotel management and the local theatre. The theatre tickets cost the Lever Hotel $95 a pair. The Lever Hotel's fixed costs specific to this project (marketing and administration) are budgeted at $20,000.
The hotel's management believes that the 'theatre package' will have no effect on their usual Q1 customers, who are all business travellers and who have no interest in theatre tickets, but will still require their usual rooms.
Project 2 – Restaurant
There is scope to extend the Lever Hotel and create enough space to operate a restaurant for the benefit of its guests. The annual costs, revenues and volumes for the combined restaurant and hotel are illustrated in the following graph:
A. Using the current annual budgeted figures, and ignoring the two proposed projects, calculate the breakeven number of occupied room nights and the margin of safety as a percentage.
B. Ignoring the two proposed projects, calculate the budgeted profit or loss for Q1 and explain whether the hotel should close for the duration of Q1.
C. Calculate the breakeven point in sales value of Project 1 and explain whether the hotel should adopt the project.
D. Calculate the breakeven point in sales value of Project 1 and explain whether the hotel should adopt the project.
Note. There are up to four marks available for calculations.