Wesley Horn, owner of Horn\'s Inn, has recently decided to h manage his lodging
ID: 2794861 • Letter: W
Question
Wesley Horn, owner of Horn's Inn, has recently decided to h manage his lodging property. Horn's Inn has 150 guestrooms a coffee shop. The average annual revenue is as follows: have Service, Inc., nd a 100-sea Room sales Food sales Other income Total $1, 800,000 600,000 100,000 $2,500,000 lAUOE is expected to be 40% of total revenue each year. Service, Inc. has proposed three post-opening management fee options 1. $1,500 per guestroom per year 2.4% of total sales and 15% of IAUOE 3.6% of room sales, 2% of food sales, and 18% of IAUOE Required: 1. Identify which option Wesley Horn should prefer if his sole goal is to min- imize management fees. 2. Identify the option Service, Inc, would most likely prefer.Explanation / Answer
Option 1 - $1500 per guestroom per year
Total Cost to Wesley Horn / Total fee of Service Inc. = $1500 x 150 = $225,000
Option 2 - 4% of total sales and 15% of IAUOE
The total sales would be sum of Room sales and Food sales, i.e., $1,800,000 + $600,000 = $2,400,000
IAUOE is 40% of Total revenue, i.e., 40% of $2,500,000 = $1,000,000
Total Cost to Wesley Horn / Total fee of Service Inc. = 4% x $2,400,000 + 15% x $1,000,000 = $246,000
Option 3 - 6% of room sales, 2% of food sales and 18% of IAUOE
Room Sales = $1,800,000 , Food Sales = $600,000 , IAUOE = $1,000,000
Total Cost to Wesley Horn / Total fee of Service Inc. = 6% x $1,800,000 + 2% x 600,000 + 18% x $1,000,000 = $300,000
1) Wesley Horn would prefer option 1 as it has the least cost.
2) Service, Inc. would prefer option 3 as it has the highest fee.
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