7-21 operates a 100-room hotel near a busy amusement park. During June, a 30-day

Question

7-21 operates a 100-room hotel near a busy amusement park. During June, a 30-day m experienced through Sunday evenings (weekend nights), however and 12 Considerations other than cost in pricing decisions. Fun Stay Express onth, Fun Stay Express a 65% occupancy rate from Monday evening through Thursday evening (weeknights). On Friday occupancy increases to 90%. (There were 18 weeknights weekend nights in June.) Fun Stay Express charges $85 per night for a suite. Fun Stay Express recently Jhnsonto manage the hotel to increase the hotel's profitabilit.,The following information relates to Fun Stay Express' costs: Fixed Cost $25,000 per month $38,000 per month $16,000 per month $12,000 per month Variable Cost Depreciation Administrative costs Housekeeping and supplies Breakfast $30 per room-night $6 per breakfast served Fun Stay Express offers free breakfast to guests. In June, there were an average of 2 breakfasts served per room night on weeknights and 4 breakfasts served per room night on weekend nights 1. Calculate the average cost per room-night for June. What was Fun Stay Express' operating income or loss Req for the month? Gina Johnson estimates that if Fun Stay Express decreases the nightly rates to $75, weeknight occupancy will increase to 75%. She also estimates that if the hotel increases the nightly rate on weekend nights to $105, occupancy on those nights will remain at 90%. Would this be a good move for Fun Stay Express? Show your calculations. 2. 3. Why would the guests tolerate a $30 price difference between weeknights and weekend nights? 4. A discount travel clearinghouse has approached Fun Stay Express with a proposal to offer last-minute deals on empty rooms on both weeknights and weekend nights. Assuming that there will be an average of three breakfasts served per night per room, what is the minimum price that Fun Stay Express could accept on the last-minute rooms?

Explanation / Answer

1.

Guest nights on weeknights:
18 weeknights × 100 rooms × 65% =                              1,170
Guest nights on weekend nights:
12 weekend nights × 100 rooms × 90% =                       1,080
Total guest nights in June = 1,170 + 1,080 =                  2,250
Breakfasts served:
1,170 weeknight guest nights × 2 =                                2,340
1,080 weekend guest nights × 4 =                                  4,320
Total breakfasts served in June = 2,340 + 4,320 =        6,660
Total costs for June:
Depreciation $                                                                  25,000
Administrative costs                                                        38,000
Fixed housekeeping and supplies                                 16,000
Variable housekeeping and supplies (2,250 × $30)   67,500
Fixed breakfast costs                                                      12,000
Variable breakfast costs (6,660 × $6)                          39,960
Total costs for June $                                                   198,460
Cost per guest night ($198,460 ÷ 2,250)                    $88.20
Revenue for June ($85 × 2,250)                              $191,250
Total costs for June                                                     198,460
Operating income/(loss) $                                          (7,210)

New weeknight guest nights
18 weeknights × 100 rooms × 75% =                    1,350
New weekend guest nights
12 weeknights × 100 rooms × 90% =                    1,080
Total guest nights in June l = 1,350 + 1,080=        2,430
Breakfasts served:
1,350 weeknight guest nights × 2 =                       2,700
1,080 weekend guest nights × 4 =                         4,320
Total breakfasts served in June = 2,700 + 4,320= 7,020
Total costs for June:
Depreciation $                                                     25,000
Administrative costs                                             38,000
Fixed housekeeping and supplies                      16,000
Variable housekeeping and supplies

(2,430 × $30)                                                       72,900
Fixed breakfast costs                                          12,000
Variable breakfast costs (7,020 × $6)                 42,120
Total costs                                                       $206,020
Revenue [(1,350 × $75) + (1,080 × $105)]      $214,650
Total costs for June                                          206,020
Operating income $                                               8,630

Yes, this pricing arrangement would increase operating income by $15,840 from an operating loss of $7,210 to an operating income of $8,630 ($8,630 + $7,210 = $15,840).

3. Guests typically do not come to the amusement park on weekdays because adults are busy at work and children have to attend school. The weeknight guests are families who stay at the hotel for convenience. They are willing to consider other hotel options or even not travel at all if the price is high and unaffordable. Reducing the weeknight price is important to entice families to try to come to the amusement park on weekdays. The demand of weeknight guests is elastic.
In contrast, weekends are really the only time when families can conveniently come to the amusement park given their busy weekday schedules. The demand of pleasure travelers on weekends is inelastic. Because of the differences in preferences of the weeknight and weekend guests, Fun Stay Express can price discriminate between these guests by charging $30 more on weekends than on weeknights and still have weekend travelers stay at the hotel.

4. Fun Stay Express would need to charge a minimum of $48 per night for the last-minute rooms, an amount equal to the variable cost per room. Variable cost per room night = $30 per room night + $6 × 3 breakfasts = $48. Any price above $48 would increase Executive Suites operating income.

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