Question

Hotel California Hotel California is a luxury hotel which has just got a new manager, Rocky. Given its location and quality, the hotel always had enough people making advance reservations to fill up all the rooms available. The hotel charges $200 per room per night for reservations made in advance (Hint:think of this $200 as the purchasing cost in the Newsvendor model). Rocky had taken the OPRE3310 at UTD last semester and decided to implement some of those techniques in his current job. He implemented a policy of reserving some rooms for last-minute requests and charges these requests S300 per room per night (Hint: think of this $300 as the selling price in the Newsvendor model) The unsold reserved rooms are worth nothing at the end of the day (Hint: that is the salvage value is $0). Based on his estimation, the number of last minute customers is uniformly distributed with minimum of 1 and maximum of 10
a) How much is the cost of reserving too little by one? That is the underage cost, Cu
b) How much is the cost of reserving too much by one? That is the overage cost, Co
c) What is the optimal service level?
d) How many rooms should be reserved for last-minute customers? Hint: what is Q"?

Answer 1

Answer:

Hotel California

a) The cost of reserving too little by one, (the underage cost) Cu

= $100

b) The cost of reserving too much by one, (the overage cost) Co =

= $200

c) The optimal service level

= 0.33

d) The number of rooms that should be reserved for last-minute customers, Q

= 3

Explanation:

a) Data and Calculations:

Charges per room per night (purchase cost) = $200

Charges for last-minute requests per room per night (selling price) - $300

Value of unsold reserved rooms (Salvage value) = $0

Minimum of last-minute customers, Min = 1

Maximum of last-minute customers, Max = 10

a) The cost of reserving too little by one, (the underage cost) Cu = Selling price - Purchasing cost

= $300 - $200

= $100

b) The cost of reserving too much by one, (the overage cost) Co = Purchasing cost - Salvage value

= $200 - $0

= $200

c) The optimal service level = Cu/Co+Cu

= $100/$200 + $100

= $100/$300

= 0.33

d) The number of rooms that should be reserved for last-minute customers, Q

= Cu/Co+Cu (Max - Min) + Min

= 0.33 * (10 - 1) + 1

= 0.33 * (10)

= 3