Question

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
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 income for an average weekend between the existing (Alternative 1) and discount (Alternative 2) price plan.
D. Should management accept the proposed weekend pricing plan? Explain.

Answer 1

Answer: See explanation and attachment

Explanation:

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?

Price = $180

Less: Variable Costs:

House keeping staff = $23

Utilities = $7

Amenities = $3

Total variable costs = $33

Contribution margin = $147

B. Determine the contribution margin for a room night under the proposed weekend pricing.

Price = $120

Less: Variable Costs:

House keeping staff = $23

Utilities = $7

Amenities = $3

Total variable costs = $33

Contribution margin = $87

C. Prepare a differential analysis showing the differential income for an average weekend between the existing (Alternative 1) and discount (Alternative 2) price plan.

Check attachment for solution

D. Should management accept the proposed weekend pricing plan? Explain.

No. From the calculation in C, there is reduction in income.