HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain ha
ID: 2545494 • Letter: H
Question
HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 21 properties with an average of 200 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 75 percent, based on a 365-day year. The average room rate was $210 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:
HomeSuites Operating Income Year 1 Sales revenue Lodging $ 138,060,000 Food & beverage 39,091,500 Miscellaneous 11,497,500 Total revenues $ 188,649,000 Costs Labor $ 79,873,500 Food & beverage 22,995,000 Miscellaneous 13,797,000 Management 2,509,000 Utilities, etc. 37,800,000 Depreciation 10,500,000 Marketing 16,500,000 Other costs 3,250,000 Total costs $ 187,224,500 Operating profit $ 1,424,500
In year 1, the average fixed labor cost was $409,000 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 75 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 $261 per night. They realize that this will reduce demand and estimate that the occupancy rate will fall to 65.0 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 $174, they can achieve an occupancy rate of 85 percent. The current estimated profit is $139,623,405.
Required:
a. Prepare the budgeted income statement for year 2 if the "High Price" strategy is adopted. (Round your per unit average cost calculations to 2 decimal places.)
Home Suites
Operating Income
Year 2
Sales Revenue
Lodging
Food & Bev.
MISC
Total Revenues
Costs
Labor
Food & Bev.
MISC
Management
Utilities, ECT
Depreciation
Marketing
Other Costs
Total Costs
Operating Profit
b. Prepare the budgeted income statement for year 2 if the "High Occupancy" strategy is adopted.
Home Suites
Operating Income
Year 2
Sales Revenue
Lodging
Food & Bev.
MISC
Total Revenues
Costs
Labor
Food & Bev.
MISC
Management
Utilities, ECT
Depreciation
Marketing
Other Costs
Total Costs
Operating Profit
Explanation / Answer
a) Year: 2, High Price Strategy Particulars $ Sales Revenue Lodging (261×25×200×365×0.65) 309611250 Food & Bevearage 32266000 {39091500×(25/21)×0.80×(0.65/0.75)} MISC 11862500 {11497500×(25/21)×(0.65/0.75)} A) Total Revenues 353739750 Costs Labor 95087500 {79873500×(25/21)} Food & Bevearage 23725000 {(22995000×(25/21)×(0.65/0.75)} Miscellaneous 17793750 {(13797000×1.25×(25/21)×(0.65/0.75)} Management 3225857.14 {(2509000×1.08×(25/21} Utilities, etc. 45000000 {(37800000×(25/21)} Depreciation 12500000 (10500000×25/21) Marketing 18150000 (16500000×1.1) Other costs 3869047.62 {(3250000×(25/21)} B) Total Cost 219351154.76 C) Operating Profit (A-B) 134388595.24 b) Year: 2, High Occupancy Strategy Particulars $ Sales Revenue Lodging (174×25×200×365×0.85) 269917500 Food & Bevearage 42194000 {39091500×(25/21)×0.80×(0.85/0.75)} MISC 15512500 {11497500×(25/21)×(0.85/0.75)} A) Total Revenues 327624000 Costs Labor 95087500 {79873500×(25/21)} Food & Bevearage 31025000 {(22995000×(25/21)×(0.85/0.75)} Miscellaneous 23268750 {(13797000×1.25×(25/21)×(0.85/0.75)} Management 3225857.14 {(2509000×1.08×(25/21)} Utilities, etc. 45000000 {(37800000×(25/21)} Depreciation 12500000 (10500000×25/21) Marketing 18150000 (16500000×1.1) Other costs 3869047.62 {(3250000×(25/21)} B) Total Cost 286419904.76 C) Operating Profit (A-B) 41204095.24
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