Grand Garden is a luxury hotel with 155 suites. Its regular suite rate is $230 p

Question

Grand Garden is a luxury hotel with 155 suites. Its regular suite rate is $230 per night per suite. The hotel’s cost per night is $155 per suite and consists of the following. Variable direct labor and materials cost $ 51 Fixed cost [($5,870,000/155 suites) ÷ 365 days] 104 Total cost per night per suite $ 155 The hotel manager received an offer to hold the local Bikers’ Club annual meeting at the hotel in March, which is the hotel’s low season with an occupancy rate of under 55%. The Bikers’ Club would reserve 45 suites for three nights if the hotel could offer a 55% discount, or a rate of $103 per night. The hotel manager is inclined to reject the offer because the cost per suite per night is $155. Required: Prepare an analysis of this offer for the hotel manager.

Explanation / Answer

The hotel manager should accept the offer, as an additional contribution of $ 7,020 can be realized towards fixed costs.

$ Revenue from the offer ( 45 x $103 x 3) 13,905 Total variable cost ( 45 x $ 51 x 3) 6,885 Contribution margin 7,020

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