Revenue Management Assignments I. Le Meridien in San Francisco has 160 rooms. Th

Question

Revenue Management Assignments

I. Le Meridien in San Francisco has 160 rooms. The hotel has an ample low fare demand at the room rate of $200 per night, but the demand from the high fare class which pays $450 per night on average, is uncertain. The high fare demand is normally distributed with mean 60 and standard deviation 42.

·        How many rooms should Le Meridien protect for high fare customers to maximize expected revenue? (Leave your answer in decimal form, i.e., no need to round to an integer value.)

·        Suppose Le Meridien sets a booking limit of 100 for low fare customers. How many high fare customers does the hotel expect to turn away due to a lack of rooms?

·        When high-fare demand is less than their protection level, the Le Meridien assumes rooms go empty because it is too late to sell the rooms to low-fare arrivals. But now they have an opportunity to sell those rooms at the last-minute to a third party seller of opaque goods (such as hotwire.com and price-line). The third party seller buys the room inventory on the day at $80, and assumes all the risk of selling those rooms on its website. What critical ratio should the hotel use for setting the protection level for its high fare customer class (who continue to pay $450 per night, and whose demand is still normally distributed with mean 60 and standard deviation 42) knowing that it now has this opportunity to sell off remaining inventory at the last minute for $80? (Early demand at the low fare of $200 remains ample and Le Meridien still makes this decision to maximize expected revenue.)

Explanation / Answer

Co = Cost of Overage (excess booking) = 200 . it is the cost of booking more rooms for high fare customers than the actual demand. So the unsold rooms lose the minimum revenue of low fare, which they would have otherwise earned from low fare customers.

Cu = Cost of Underage (short booking) = 450 - 200 = 250. it is the cost of booking less rooms for high fare customers than the actual demand. If the rooms were booked for high fare customers as per demand, they would have earned the high fare of $ 450 instead of the low fare $ 200.

Critical Ratio (CR) = Cu / (Co + Cu) = 250 / (200 + 250) = 0.56

Mean of high fare demand, µ = 60

Standard deviation of demand, = 42

Optimal protection level for high fare custoomers = z + µ = 60 + 42*0.56 = 83.3 rooms

Q1. How many rooms should Le Meridien protect for high fare customers to maximize expected revenue? (Leave your answer in decimal form, i.e., no need to round to an integer value.) Answer = 83.33 rooms

Q2. If the hotel sets a booking limit of 100 for low fare customers, that leaves 60 rooms for high fare customers. Whereas the average expected number of high fare customers is 60.So the hotel expected to turn away 23.33 (=83.33-60) high fare customers due to lack of rooms.

Q3. In the cost of overbooking (Co) changes to 200 - 80 , i.e. 120 , because the hotel is able to earn $ 80 for the unsold room, which otherwise would have earned $ 200 from low fare customer. so the difference is the opportunity cost of lost sales.

Therefore the new CR = 120 / (120 + 250) = 0.68

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.