The Fairmont hotel is looking to add a concierge floor to their hotel. The hotel
ID: 2468224 • Letter: T
Question
The Fairmont hotel is looking to add a concierge floor to their hotel. The hotel is 9 floors with the first floor being a restaurant. The upper 8 floors have the exact same layout. There are 320 rooms in the hotel. The owners of the Fairmont are looking at taking out 6 rooms on the top floor and turning them into an amenity room.
In 2003 the hotel had a 85% occupancy rate., their room revenue was $20,100,000. The hotel is hoping to attract an upscale, turn some of their regular clientele onto the Amenity level, and retain all of their old business. This is the estimated Income Statement for the upcoming year. The Amenity floor would be completed and operational by January 1, 2005. (Do not worry about leap year)
Estimated Income Statement for 2004
Rooms Revenue $20,100,000
Payroll $3,015,000
Other Rooms Expenses $1,005,000
Food and Beverage Revenue $6,000,000
Food and Beverage Payroll $1,920,000
Other Food and Beverage Expenses $580,000
Cost of Goods Sold $2,500,000
Telephone Revenue $800,000
Cost of Sales $700,000
Telephone Payroll $300,000
Rental Revenue $1,000,000
Undistributed Operating Expenses
Marketing $2,000,000
Administrative and General $4,000,000
Property and Operation Maintenance $2,000,000
Electric and Water $2,000,000
Fixed Charges
Mortgage $1,000,000
Property Taxes $1,500,000
Insurance $2,000,000
Interest $1,500,000
Depreciation $750,000
Rooms Revenue Predictions for next year include
90% occupancy on floors 2-8
75% occupancy for the ninth floor.
Rooms Payroll and Rooms Other will remain the same percent of Rooms Revenue.
The Room Rate on floors 2-8 will remain the same as last year.
The Rate for the ninth floor will be $110 more per night than the other rooms.
Food and Beverage Revenue is expected to remain the same, but Payroll, COGS and other expenses will all increase by 5% to sustain the extra services that are offered on the ninth floor.
Telephone and Other Income will also same the same as the previous year.
The Hotel has decided to increase its marketing in the beginning of the expansion by $300,000 / year to make sure the operation is successful.
Tax Rate for both years would be 25%
Due to the expansion, the hotel will increase its mortgage by $250,000/ year and its interest by $324,392 / year.
As the hotel’s General Manager, it is up to your discretion to decide whether or not to pursue the expansion. Give your findings in support for or against proceeding with the upgrades. Show an estimated Income Statement for 2005. For your analysis make sure that you look beyond the first year’s financial findings.
Explanation / Answer
Estimated income Statement After ninth Floor Revenue Expenses Revenue Expenses Room Revenue 201,000,000 204,506,048 Payroll 3,015,000 3,067,591 Others Rooms Expenses 1,005,000 1,022,530 Food & Beverage Revenue 6,000,000 6,000,000 Food & Beverage Payroll 1,920,000 2,016,000 Other Food and Beverage Expenses 580,000 609,000 Cost of Goods Sold 2,500,000 2,625,000 Telephone revenue 800,000 800,000 Cost of Sale 700,000 735,000 Telephone Payroll 300,000 315,000 Rental Revenue 1,000,000 1,000,000 Undistributed Operating Expenses marketing 2,000,000 2,300,000 Administrative and general 4,000,000 4,200,000 Property and operation maintenance 2,000,000 2,100,000 Electric & Water 2,000,000 2,100,000 Fixed Charges Mortgage 1,000,000 1,250,000 Property tax 1,500,000 1,500,000 Insurance 2,000,000 2,000,000 Interest 1,500,000 1,824,392 Depreciation 750,000 750,000 208,800,000 26,770,000 212,306,048 28,414,513 Profit 182,030,000 183,891,535 tax 45,507,500 45,972,884 Net Income 136,522,500 137,918,651 Then hotel should expand the plan because it is profitable
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