HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain ha

Question

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 16 properties with an average of 150 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 70 percent, based on a 365-day year. The average room rate was $204 for a night. The basic unit of operation is the "night, which is one room occupied for one night. The operating income for year 1 is as follows HomeSuibes $138.090.000 Food & beverage 158 325.600 40.931 200 11,037,600 2512.000 Operating proft 22,741.200 In year 1, the average fixed labor cost was $412,000 per property. The remaining labor cost was variable with respect to the number of nights. Food and beverage cost and miscellaneous cost are all variable with respect to the number of nights. Utilities and depreciation are fixed for each property. The remaining costs (management, marketing, and other costs) are fixed for the firm. At the beginning of year 2, HomeSuites will open four new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 70 percent. Management has made the following additional assumptions for year 2: The average room rate will increase by 5 percent. . Food and beverage revenues per night are expected to decline by 20 percent with no change in the cost . The labor cost (both the fixed per property and variable portion) is not expected to change The miscellaneous cost for the room is expected to increase by 25 percent, with no change in the miscellaneous revenues per room. Utilities and depreciation costs (per property) are forecast to remain unchanged Management costs will increase by 8 percent, and marketing costs will increase by 10 percent. Other costs are not expected to change The managers of HomeSuites are considering different pricing strategies for year 2. Under the first strategy ("High Price"), they will work to maintain an average price of $234 per night. They realize that this will reduce demand and estimate that the occupancy rate will fall to 60.0 percent with this strategy. Under the alternative strategy (High Occupancy"), they will work to increase the occupancy rate by lowering the average price. They estimate that with an average nightly rate of $194 they can achieve an occupancy rate of 80 percent. The current estimated profit is $25,332,615

Explanation / Answer

HomeSuits Operating Income Year 2 Different Strategies High Occupancy Strategy (b) High Price Strategy (a) Current Strategy Particulars Amount($) Amount($) Amount($) Sales Revenue Lodging 169944000 153738000 164184300 Food And Beverages 15417600 11563200 13490400 Miscellaneous 9636000 7227000 8431500                                                                         Total Revenue 194997600 172528200 186106200 Costs    Labor 57296000 45032000 51164000 Food&Beverages 15768000 11826000 13797000 Miscellaneous 14235000 10676250 12455625 Management 2712960 2712960 2712960 Utilities etc 40000000 40000000 40000000 Depreciation 10000000 10000000 10000000 Marketing 27632000 27632000 27632000 Other Costs 8012000 8012000 8012000                                                                                                                                       Total Cost 175655960 155891210 165773585 Operating Profit 19341640 16636990 20332615 C.It is beneficial to follow Current Strategy rather than manager strategy

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