7. KINGSTON PARK RESORT
Kingston Park Resort is a new theme park resort located in the country of Cyprus. The resort is made up of a theme park, a hotel and an indoor water park. The resort opened two months ago and is already very popular.
As all theme parks in Cyprus are required, by law, to shut down in the colder month of January because of the risk of accidents, Kingston Park Resort must decide whether to shut down the whole resort or just the theme park. It could choose to keep open the hotel and/or the water park.
Since Kingston Park Resort has not been open for long, there is limited historical data available about costs and revenues. However, based on the last two months, the following average monthly data is available:
Number of rooms 120
Average room rate per night $100
Average occupancy rate per month 90%
Average nightly spend on 'extras' per room $20
Contribution margin for 'extras'* 60%
Number of visitors per month 12,000
Admission price per visitor $21
Average spend on 'extras' per visitor $12
Contribution margin for 'extras'* 60%
*'Extras' includes anything purchased by the customer not included in the room rate or admission price.
Management estimates that, for January, the average room rate per night would need to decrease by 30% and the admission price for the water park by 20%. With such reductions, it is estimated that an occupancy rate of 50% would be achieved for the hotel and that the number of visitors to the water park would be 52% lower than current levels. The average nightly spend on 'extras' per room of $20 at the hotel and $12 per customer at the water park is expected to remain unchanged.
The running costs for the hotel and water park for each of the last two months are as follows:
Notes Hotel Water park
Staff costs 1 120,000 75,600
Maintenance costs 2 14,600 6,000
Power costs 3 20,000 18,000
Security costs 4 13,600 8,000
Water costs 5 12,900 12,100
Notes 1. Staff costs
Permanent staff Included in the staff costs for the hotel is the salary of $30,000 per annum for the hotel manager and $24,000 per annum for the head chef. These are both permanent members of staff who are paid for the full year regardless of their working hours.
The water park employs one permanent member of staff, the manager, on a salary of $24,000 who is also paid for the full year regardless of his working hours.
2. Temporary staff
The remaining staff costs relate to temporary staff who are only paid for the hours they work. If the hotel stays open in January, half of these staff members will continue to work their current hours because their jobs are largely unaffected by guest occupancy rates. However, the other half of the staff will work proportionately less hours to reflect the 50% occupancy rate in January as opposed to the 90% occupancy rate of the last two months.
At the water park, the temporary staff's working hours will fall according to the number of visitors, hence a fall of 52% would be expected for January. 3. Maintenance costs
Maintenance is undertaken by a local company, 'Techworks', which bills Kingston Park Resort for all work carried out each month. If the hotel and water park are closed, Techworks will instead be paid a flat fee for the month of $4,000 for the hotel and $2,000 for the water park. 4. Power costs
Park Resort pays a fixed monthly charge for electricity of $8,000 for the hotel and $7,000 for the water park, all year round.
The gas charges relate to heating and include a fixed charge of $2,200 per month for the hotel and $1,500 per month for the water park. The remainder of the gas charges is based solely on usage and would be expected to increase by 50% in January because of the colder weather. 5. Security costs
If the hotel and water park close, no changes will be made to the current arrangements for security whilst the premises are empty. 6. Water costs
It is estimated that water costs for the hotel would fall to $6,450 for the month if it remains open in January. However, the water costs for the water park would be expected to remain at their current level. If the hotel and water park were closed, all water would be turned off and no charges would arise.
A. Calculate the incremental cash flows, for the month of January (31 days), if Kingston Park Resort decides to keep open:
i) The hotel;
ii) The water park.
In each case, state whether it should remain open or should close.
B. Discuss any other factors which Kingston Park Resort should consider when making the decision in part (a).