Terminus Hotels
1. Assess the decisions made by the hotel’s management in relation to the various offers received
Due to the uncertain economic and financial situation in 2008, the Marketing Department of the Terminus Hotel forecasted an average occupation level of 40% during 2009. In November 2008, the department received two offers from regular customers, the first at a rate of €90 for 10 rooms per day, and the second at a rate of €95 for 5 rooms per day. Both offers were rejected.
Based on the numbers, it appears that the accounting department rejected both offers because the rate fell short of the total cost per room per day for the hotel. Assuming an occupancy rate of 40% and Master-Budget Capacity Utilization costing, the budgeted total room cost per day was €111 (€86 fixed cost + €25 variable cost). Capacity Concept | Fixed Costs | Capacity Level | Fixed Cost per Room | Variable Cost per Room | Total Cost per Room | Theoretical Capacity | 2,500,000 | 200 | 34 | 25 | 59 | Practical Capacity | 2,500,000 | 195 | 35 | 25 | 60 | Normal Capacity | 2,500,000 | 120 | 57 | 25 | 82 | Master-budget Capacity | 2,500,000 | 80 | 86 | 25 | 111 |
Additionally, if the costing department decided to recalculate the unit costs due to the loss of the “regular” customers, thus spreading the fixed cost over a smaller number of rooms, the price would rise and become increasingly uncompetitive; effectively a downward demand spiral.
Finally, the case states “As in the case of Pearson Travel, Impressa Reisen kept to its regular bid and did not depart from previous forecasts”, which indicates that in previous years both bids would have been accepted. Assuming that in the previous years, the occupancy rate matched the longer-term average of 60% (Normal Capacity), the total cost per room at €82, would have been below the bid price, and thus accepted.
In summary, the choice of Master-Budget Capacity Utilization, especially in a year-of-crisis when fixed costs are spread across a
Due to the uncertain economic and financial situation in 2008, the Marketing Department of the Terminus Hotel forecasted an average occupation level of 40% during 2009. In November 2008, the department received two offers from regular customers, the first at a rate of €90 for 10 rooms per day, and the second at a rate of €95 for 5 rooms per day. Both offers were rejected.
Based on the numbers, it appears that the accounting department rejected both offers because the rate fell short of the total cost per room per day for the hotel. Assuming an occupancy rate of 40% and Master-Budget Capacity Utilization costing, the budgeted total room cost per day was €111 (€86 fixed cost + €25 variable cost). Capacity Concept | Fixed Costs | Capacity Level | Fixed Cost per Room | Variable Cost per Room | Total Cost per Room | Theoretical Capacity | 2,500,000 | 200 | 34 | 25 | 59 | Practical Capacity | 2,500,000 | 195 | 35 | 25 | 60 | Normal Capacity | 2,500,000 | 120 | 57 | 25 | 82 | Master-budget Capacity | 2,500,000 | 80 | 86 | 25 | 111 |
Additionally, if the costing department decided to recalculate the unit costs due to the loss of the “regular” customers, thus spreading the fixed cost over a smaller number of rooms, the price would rise and become increasingly uncompetitive; effectively a downward demand spiral.
Finally, the case states “As in the case of Pearson Travel, Impressa Reisen kept to its regular bid and did not depart from previous forecasts”, which indicates that in previous years both bids would have been accepted. Assuming that in the previous years, the occupancy rate matched the longer-term average of 60% (Normal Capacity), the total cost per room at €82, would have been below the bid price, and thus accepted.
In summary, the choice of Master-Budget Capacity Utilization, especially in a year-of-crisis when fixed costs are spread across a