Laurentian Lodge© Laurentian Lodge is a ski resort located in the picturesque Laurentian Mountains. It is open only during the winter season spanning 20 weeks from November to March. The resort has 100 rooms each with a spectacular view of the mountains. Each room rents for $160 per night during the season. The average occupancy rate is 90% during the season. All 100 rooms of the resort are closed down for the off-season. The lodge is operated by Hotel Management Corporation (HMC) which charges a fixed base amount of $100 000 annually for its management services. In addition HMC charges a fee of $50 per room for every night it is kept open. This fee covers the costs of supervision record-keeping guest registration concierge services facility repairs and maintenance marketing insurance heating and electricity and telephone service. A further charge of $12 is paid to HMC for every night a room is occupied by a guest to cover maid and supplies expenses for cleaning rooms and replacing fresh linen and other amenities. The Laurentian Lodge also incurs an annual expense of $468 000 for depreciation of lodge building equipment and furniture. The income statement for the most recent year is in Exhibit 1. Required: 1. Classify the lodge’s expenses as either fixed or varying with respect to rooms occupied or with respect to rooms kept open during a week. 2. Does it make sense for HMC to price its services the way it does? How are its costs likely to behave? 3. Determine the break-even point in terms of average room occupancy rate each week during the 20 weeks of in-season assuming that all 100 rooms are kept open. Occupancy rate is the percentage of rooms kept open in a week that are occupied by customers. First assume that annual fixed costs are spread out evenly over 52 weeks. Next repeat the analysis spreading the annual fixed costs over only the 20 weeks the resort is open. Which of the two methods is correct? Laura Lee the owner of the lodge is concerned that she incurs expenses around the year without earning any revenues during the off-season. She would like to evaluate the possibility of keeping the lodge open during the off-season like some of the other hotel property she owns. Specifically she wants to consider keeping 30 rooms in the north wing of the lodge open during the off-season at a reduced rate of $100 per room-night. She estimated that the average occupancy rate during the off-season would be about 80% with the reduced room rate of $100 as it would be attractive to couples interested in hiking on the © This case was prepared by Professors Rajiv Banker to provide a basis for class discussion. 1 mountain trails. HMC will charge an additional $1 000 per week for management services for every week the north wing of the lodge is kept open in the off-season. HMC will also continue its charge of $50 for every night a room is kept open and $12 for every night a room is occupied during the off-season. Required: 4. Determine the break-even point in terms of average room occupancy rate during the 32 weeks of off-season under Laura Lee’s proposal. 5. Determine the average room occupancy rate necessary to generate $3 000 profit before tax per week during the off-season under Laura Lee’s proposal. 6. What are the incremental costs if the lodge is kept open? Should the proposal to keep the lodge open be adopted? Exhibit 1. Income Statement for the Year Ended March 31 2009 Sales revenue (12 600 room-nights× $160) $ 2 016 000 Expenses: Hotel Management Corp. charges: Annual fee $ 100 000 Per room-night kept open (14 000× $50) 700 000 Per room-night occupied (12 600× $12) 151 200 $951 200 Depreciation (straight-line method) 468 000 $ 1 419 200 Income before tax $ 596 800 Income tax (@40%) 238 720 Net income $ 358 080 Total number of room-nights kept open= 100 rooms× 7 days× 20 weeks= 14 000 room-nights Total number of room-nights occupied = 100 rooms× 7 days× 20 weeks× 90%= 12 600 room-nights
