rial Case Calculate breakeven and margin of cafety after hotal ranovation case i
ID: 2550260 • Letter: R
Question
rial Case Calculate breakeven and margin of cafety after hotal ranovation case is a contnuation of the Caesars Entertainment Corporation serial case that n n Chapter 1, Refer fo the introductory story in chapter t (see page 4.3) for ad nal backround (The components of the Caesars serial case can be complated order) Palacee Las Vegas made headtines when it undertook a 575 million renova in mid-September 2015, the hotel closed its then named Roman Tower, which tarted a major renovation of the 56z rooms housed in that to renovating the existing ooms and suites in the former Roman On January 1, 2016, the n ewly renamed Julius Tower reopened, rep In addition 20 guest rooms were added to the Roman Towwer With the renovation completed expects the Julius Tower room rate to average around $149 per night. Ts in a S25 or 20 2% increase, reflects, in part, the Assume that the annual fixed operating costs for the Julius Tower in Caesars Palaceo will be $5,000,000. This amount represents an increase o to pre tenovation. Also assume that the variable cost por hotel room night after f $200,000 per year variable cost per roorn night was 520 91,2%, according to its 2014 Form 10-K. By comparison, the "verge hotel occu- n is $27: before t the The average hotel occupancy rate, in 2014, for Caesars Entertainment Corporation rate in Las Vegas overall, for that same time period, was 86 8%, according to Requirements . What cost types, associated with a hotel room in the Julius Tower, are variable with re- spect to hotel room occupancy? What cost types are fixed with respect to hotel room occupancy? , Refore the renovation, how many hotel room nights were needed to break even in the original Roman Tower (now Julius Tower)? Using Caesars' occupancy rate, what was the margin of safety in units before the renovation? What is the margin of safety n units if the Las Vegas hotel occupancy rate is used instead of Caesars' occupancy rate? After the renovation, how many hotel room nights are needed to break even in the Julius Tower? Using Caesars' occupancy rate, what is the margin of safety in units after the renovation? What is the margin of safety in units if the Las Vegas hotel oc- cupancy rate is used instead of Caesars' occupancy rate? Which hotel occupancy rate estimate is more appropriate in this case? Why?Explanation / Answer
1) Variable costs are clearly related to hotel occupancy and business volume.
Examples: Food, beverages, house cleaning supplies,flower arrangements, T&A commission etc
Here variable cost per hotel room night was $20 before renovation and $ 27 after renovation.
Fixed costs: Fixed costs are normally not effected by changes in occupance and sales volume.
E.g:Building taxes to Govt, Wages to employees, Outsourced service contracts for fixed amount e.g security services, AMC etc
Here it is $300000 before renovation and $500000 per year after renovation.
2) Break even means no profit and no loss.
Before renovation,
Revenue per room night =124
Less Variable cost per roomnight = (20)
Contribution per room night = 104
BEP=Fixed cost/ Contribution per room night=$300000/104=2885 room nights.
MOS (Caesars occupancy rate)=91.2%×365×567-2885=185858 roomnights.
MOS ( Las vegas occupancy rate)=86.8%×365×567-2885=176752 roomnights.
3) After renovation,
Revenue per roomnight =149
Less variable cost per roomnight=(27)
Contribution per room night= 122
BEP= 500000/122=4098 roomnights
MOS (Caesar's occupancy rate) =91.2%×587×365-4098=191303 room nights
MOS ( Las vegas Occupancy rate)= 86.8%×587×365-4098=181875 roomnights.
Since 91.2 % represents the occupancy rate of the hotel itself and the management has estimated and reported it in its 10k report in 2014, it may be believed more appropriate rather than just taking Occupancy rate given in internet for a Location/ place because this 86.8% represents average number for all hotels in Las vegas. This may be used in the absence of specific management estimate or for ensuring the reasonableness of management estimate.
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