Concept explainers
Service yield pricing and differential equations
Cityscape Hotels has 200 rooms available in a major metropolitan city. The hotel is able to attract business customers during the weekdays and leisure customers during the weekend. However, the leisure customers on weekends occupy fewer rooms than do business customers on weekdays. Thus, Cityscape plans to provide special weekend pricing to attract additional leisure customers. A hotel room is priced at $180 per room night. The cost of a hotel room night includes the following:
The special weekend price is proposed for $120 per room night. At this price, it is anticipated that average occupancy for the weekend (Friday, Saturday, and Sunday) will increase from 30% to 50% of available rooms.
- a. What is the contribution margin for a room night under the normal pricing if only the hotel
depreciation and hotel staff (excluding housekeeping) are assumed fixed for all occupancy levels? - b. Determine the contribution margin for a room night under the proposed weekend pricing.
- c. Prepare a differential analysis showing the differential profit for an average weekend between the existing (Alternative 1) and discount (Alternative 2) price plans.
- d. Should management accept the proposed weekend pricing plan? Explain.
(a)
Calculate the contribution margin for a room night at Hotel C.
Explanation of Solution
Product pricing: Product pricing is the method used for fixing a price for the products sold or the services offered to the consumers. The main aim of product pricing is to calculate the cost and the contribution margin, based on which the price is fixed.
Contribution Margin: Contribution Margin refers to the margin of profit expected by the company. The contribution margin is the difference between the selling price and the cost of the product
Calculate the contribution margin for a room night.
Rate per room night | $180.00 | |
Variable Costs per room night: | ||
Housekeeping service | $23.00 | |
Utilities | $7.00 | |
Amenities | $3.00 | |
Total variable cost per room night | $33.00 | |
Contribution margin per room night | $147.00 |
Table (1)
Therefore, the contribution margin for a room night at Hotel C is $147.
The contribution margin for a room night at Hotel C is $147. The fixed costs are already distributed among the occupied rooms. Hence the fixed cost is not included in the calculation of the contribution margin for a room night at Hotel C, which is $147.
(b)
Ascertain the contribution margin for a room night at Hotel C, under proposed weekend pricing.
Explanation of Solution
Calculate the contribution margin for a room night.
Rate per room night | $120.00 | |
Variable Costs per room night: | ||
Housekeeping service | $23.00 | |
Utilities | $7.00 | |
Amenities | $3.00 | |
Total variable cost per room night | $33.00 | |
Contribution margin per room night | $87.00 |
Table (2)
The contribution margin for a room night at Hotel C is $87. The fixed costs are already distributed among the occupied rooms. Hence the fixed cost is not included in the calculation of the contribution margin for a room night at Hotel C, under proposed weekend pricing which is $87.
(c)
Prepare the differential analysis for Hotel C, showing differential income for an average weekend on the given and proposed price plan.
Explanation of Solution
The differential analysis for Hotel C for given alternatives is shown below.
Differential Analysis of Hotel C | |||
Continue with Existing plan | Execute the Proposed plan | Differential Effect on Income | |
Revenues per weekend | (1)$32,400 | (2)$36,000 | $3,600 |
Variable cost per weekend | |||
Housekeeping Service | (3)(-) $4,410 | (4)(-) $6,900 | (-) $2,760 |
Utilities | (5)(-) $1,260 | (6)(-) $2,100 | (-) $840 |
Amenities | (7)(-) $540 | (8)(-) $900 | (-) $360 |
Total Variable Cost per weekend | (-) $5,940 | (-) $9,900 | (-) $3,960 |
Contribution margin per weekend | $26,460 | $26,100 | (-) $360 |
Table (3)
The differential analysis of Hotel C shows a fall in income by $360, if the proposed plan is accepted, hence the proposed plan should be rejected.
Working Note:
(1) Calculate the revenue from continuing with existing plan.
(2) Calculate the revenue from executing the proposed plan.
(3) Calculate the cost of housekeepingservice for continuing with existing plan.
(4) Calculate the cost of housekeeping service for executing the proposed plan.
(5) Calculate the cost of utilities for continuing with existing plan.
(6) Calculate the cost of utilities for executing the proposed plan.
(7) Calculate the cost of amenities for continuing with existing plan.
(8) Calculate the cost of amenities for executing the proposed plan.
(d)
Explain whether the management of Hotel C, should accept the proposed weekend pricing plan.
Explanation of Solution
The management of Hotel C should not accept the proposed weekend pricing plan. The proposed plan results in the decrease in income by $360. However, if there is a greater demand and more number of rooms get filled up then the proposed plan shall bring in greater revenue.
Want to see more full solutions like this?
Chapter 11 Solutions
Managerial Accounting
- Cityscape Hotels has 200 rooms available in a major metropolitan city. The hotel is able to attract business customers during the weekdays and leisure customers during the weekend. However, the leisure customers on weekends occupy fewer rooms than do business customers on weekdays. Thus, Cityscape plans to provide special weekend pricing to attract additional leisure customers. A hotel room is priced at $180 per room night. The cost of a hotel room night includes the following: Cost Per Room Night(at normal occupancy) Housekeeping service $ 23 Utilities 7 Amenities 3 Hotel depreciation 55 Hotel staff (excluding housekeeping) 42 Total $130 a. What is the contribution margin for a room night if only the hotel depreciation and hotel staff are assumed fixed for all occupancy levels?$ b. What should be considered in setting a discount price for the weekends? The discount price should be set than the variable costs per room night so that the…arrow_forwardRound Tree Manor is a hotel that provides two types of rooms with three rental classes: Super Saver, Deluxe, and Business. The profit per night for each type of room and rental class is as follows: Rental Class Super Saver Deluxe Business Room Type I (Mountain View) $30 $35 - Type II (Street View) $15 $25 $35 Round Tree's management makes a forecast of the demand by rental class for each night in the future. A linear programming model developed to maximize profit is used to determine how many reservations to accept for each rental class. The demand forecast for a particular night is 130 rentals in the Super Saver class, 65 in the Deluxe class, and 45 in the Business class. Since these are the forecasted demands, Round Tree will take no more than these amounts of each reservation for each rental class. Round Tree has a limited number of each type of room. There are 90 Type I rooms and 130 Type II rooms. (a) Formulate and solve a linear program to determine…arrow_forwardRound Tree Manor is a hotel that provides two types of rooms with three rental classes: Super Saver, Deluxe, and Business. The profit per night for each type of room and rental class is as follows: Type I rooms do not have high-speed wireless Internet access and are not available for the Business rental class. Round Trees management makes a forecast of the demand by rental class for each night in the future. A linear programming model developed to maximize profit is used to determine how many reservations to accept for each rental class. The demand forecast for a particular night is 130 rentals in the Super Saver class, 60 in the Deluxe class, and 50 in the Business class. Round Tree has 100 Type I rooms and 120 Type II rooms. a. Formulate and solve a linear program to determine how many reservations to accept in each rental class and how the reservations should be allocated to room types. b. For the solution in part (a), how many reservations can be accommodated in each rental class? Is the demand for any rental class not satisfied? c. With a little work, an unused office area could be converted to a rental room. If the conversion cost is the same for both types of rooms, would you recommend converting the office to a Type I or a Type II room? Why? d. Could the linear programming model be modified to plan for the allocation of rental demand for the next night? What information would be needed and how would the model change?arrow_forward
- Analyze Pacific Airways Pacific Airways provides air travel services between Los Angeles and Seattle. Cost information per flight is as follows: Each flight has a capacity of 150 seats, with an average of 125 seats sold per flight at an average ticket price of 180. Assume Pacific Airways is considering a new service that would provide tickets at half price. Passengers would need to fly standby to receive the discount, but would be provided a flight for a given day of travel. An analysis revealed that an average of 8 existing passengers would use the new discounted tickets for travel. In addition, 15 new passengers would be attracted to the offer. a. Determine the contribution margin per passenger for the full-priced ticket. b. Determine the break-even number of seats sold per flight. c. Determine the contribution margin per passenger for discounted tickets. d. Should Pacific Airways offer the discounted ticket plan? Answer the question by computing the incremental contribution margin per flight for the plan.arrow_forwardComplete all requirements <><>arrow_forwardDeveloping an Equation from Average CostsParadise Pub is a high-end dog hotel located in New York. Assume that in March, when dog-days occupancy was at an annual low of 500 days, the average cost per dog-day was $26. In July, when dog-days were at a capacity level of 4,500, the average cost per dog-day was $10.(a) Develop an equation for monthly operating costs. (Let X = dog-days per month)Total cost = $ _________ + $ _________ * _______ (b) Determine the average cost per dog-day at an annual volume of 28,000 dog-days. (Round to the nearest cent.) $ ___________arrow_forward
- Wild-Water Works Water Park provides for a fun day by offering a variety of rides. Wild-Water Works Water Park sells tickets at $74 per person as a one-day entrance fee. Variable costs per person are $34 and fixed cost amount to $222,300 per month.Wild-Water Works Water Park expects to sell 7,900 tickets. Find break-even first, then compute the margin of safety in tickets and sales in dollars.arrow_forward↑ Suppose River Valley Lodge incurs $70,000 of fixed costs each month Compute the (a) total fixed cost and (b) fixed cost per guest if the hotel has 14,000 guests next month. Compare the fixed cost per guest at the higher occupancy rate to the fixed cost per guest when only 1,500 guests stay during the month. (a) Compute the total fixed cost if the hotel has 14,000 guests next month. Total fixed costs to wide changes in volume, therefore, total fixed costs will (b) Compute the fixed cost per guest if the hotel has 14,000 guests next month. First, identify the formula to compute the fixed cost per guest, then compute the foxed cost per guest at (1) 14,000 guests and at (2) 1.500 guests (Round the fixed cost per quest to the nearest cent.) Fixed cost per quest Nextarrow_forwardPlaytime Park competes with Water World by providing a variety of rides. Playtime sells tickets at $110 per person as a one-day entrance fee. Variable costs are $44 per person, and fixed costs are $412,500 per month. The breakeven number of tickets is 6,250. If Playtime Park expects to sell 6,400 tickets, compute the margin of safety in tickets and in sales dollars.arrow_forward
- A discount travel clearinghouse has approached Happy Times Hotel 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 Happy Times Hotel could accept on the last-minute rooms?arrow_forwardCost Behavior Analysis in a Restaurant: High-Low Cost Estimation Assume a Papa John's restaurant has the following information available regarding costs at representative levels of monthly sales: Monthly sales in units 5,000 8,000 10,000 Cost of food sold $10,000 $16,000 $20,000 Wages and fringe benefits 4,200 4,320 4,400 Fees paid delivery help 1,100 1,760 2,200 Rent on building 1,100 1,100 1,100 Depreciation on equipment 900 900 900 Utilities 800 920 1,000 Supplies (soap, floor wax, etc.) 250 340 400 Administrative costs 1,700 1,700 1,700 Total $20,050 $27,040 $31,700 (a) Identify each cost as being variable, fixed, or mixed. Cost of food sold Wages and fringe benefits Fees paid delivery helparrow_forwardProvide answer the accounting question with step by step calculationarrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,