Chapter 13, Problem 59P

Prepare Budgeted Financial Statements

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 15 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 70 percent, based on a 365-day year. The average room rate was $180 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:

In year 1, the average fixed labor cost was $400,000 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 three new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 70 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.

Required

Prepare a budgeted income statement for year 2.

To determine

Prepare a budgeted income statement for year 2.

Explanation of Solution

Budgeted income statement:

The budgeted income statement shows the overall profit and loss of the business in the budgeted period. It includes the sales revenue and direct and indirect cost of the production to calculate the operating profit of the budgeted period.

Prepare a budgeted income statement:

Company H Budgeted Income Statement For year 2
Particulars	Amount	Total amount
Sales revenue (1):
Lodging	173,842,200
Food & beverage	18,396,000
Miscellaneous	9,198,000
Total revenue		201,436,200
Operating costs:
Labor (4)	53,190,000
Food & beverage (1)	16,556,400
Miscellaneous (1)	13,797,000
Management (2)	2,700,000
Utilities (3)	45,000,000
Depreciation (3)	12,600,000
Marketing (2)	27,500,000
Other costs	8,000,000
Total operating cost		179,343,400
Operating profit		22,092,800

Table: (1)

Thus, the operating profit is $22,092,800 for company H for year 2.

Working note 1:

Calculate the revenue and costs for year 2:

Particulars	Total nights in a year 2 (8) (a)	Cost per night (5) (b)	% change (c)	Total amount $\text{d = (a}\times \text{b}\times \text{c)}$
Sales revenue:
Lodging	919,800	180	1.05	$173,842,200
Food & beverage	919,800	$25	0.8	$18,396,000
Miscellaneous	919,800	$10	-	$9,198,000
Costs:
food & beverage	919,800	$18	-	$16,556,400
Miscellaneous	919,800	$12	1.25	$13,797,000

Table: (2)

Working note 2:

Calculate the management and marketing costs:

Particulars	Amount (a)	% change (b)	Total amount     $C=\left(a\times b\right)$
Costs:
Management	2,500,000	1.08	2,700,000
Marketing	2,500,000	1.1	2,750.000

Table: (3)

Working note 3:

Calculate the utilities and depreciation:

Particulars	Amount (a)	Number of property in year 1 (b)	Cost per property     $\text{c =}\frac{\text{a}}{\text{b}}$	Number of property in year 2 (d)	Total cost in year 2 $\text{e = }\left(\text{c×d}\right)$
Costs:
Utilities	$3,750,000	15	$250,000	18	$4,500,000
Depreciation	$1,050,000	15	$70,000	18	$1,260,000

Table: (4)

Working note 4:

Calculate the labor cost:

Particulars	Cost per property (a)	Number of property (b)	Total nights in a year 2     $C=\left(a\times b\right)$	Variable labor cost per night (d)	Total variable cost     $E=\left(d\times 50\left(6\right)\right)$	Total cost     $F=\left(E+C\right)$
Labor cost	$400,000	18	$7,200,000	919,800	$45,990,000	$53,190,000

Table: (5)

Working note 5:

Particulars	Amount (a)	Total nights in a year (7) (b)	Cost per night     $C=\left(a\times b\right)$
Revenue:
Food & beverage	$19,162,500	766,500	$25
Miscellaneous	$7,665,000	766,500	$10
Costs:
Food & beverage	$13,797,000	766,500	$18
Miscellaneous	$9,198,000	766,500	$12

Table: (6)

Working note 6:

Calculate average variable cost per unit:

Particulars	Total fixed labor cost (a)	Labor cost for year 1 (b)	Net labor cost     $\text{c = (a+b)}$	Total nights in a year (d)	Cost per night     $\text{e = }\frac{\text{d}}{\text{e}}$
Labor cost	$6,000,000	$44,325,000	$38,325,000	$766,500	$50

Table: (7)

The fixed labor cost per property is $400,000, and there are 15 properties so the total fixed labor cost will be $6,000,000$\left(\$400,000\times 15\right)$.

Working note 7:

Calculate the number of nights for year 1:

Number of properties (a)	Number of rooms in each property (b)	Days in a year (c)	Occupancy rate (d)	Total nights in a year     $\text{e = (a}\times \text{b}\times \text{c}\times \text{d)}$
15	200	365	70%	766,500

Table: (8)

Working note 8:

Calculate the number of nights for year 2:

Number of properties (a)	Number of rooms in each property (b)	Days in a year (c)	Occupancy rate (d)	Total nights in a year     $\text{e = (a}\times \text{b}\times \text{c}\times \text{d)}$
18	200	365	70%	919,800

Table: (9)