CVP Relationships Recent news reports say that Expedia.com pays wholesale prices for hotel rooms and then adds an average of 26 percent markup over the price it pays, and then sells the rooms on its Web site. This approach is in contrast to other travel services that earn typically a 10 percent commis- sion of the retail price on reservations they make for the hotel. Assume that the wholesale price that Expedia pays a hotel is 60 percent of the hotel’s retail price, for the rooms that Expedia purchases.
Compute the percentage return to Expedia from purchasing and reselling the rooms.
What must have been a hotel’s expected vacancy rate if it sold rooms to Expedia at 60 percent of the wholesale price? Assume all the hotel’s costs are fixed and that if the rooms are not sold to Expedia, the rooms will either remain empty, or for the rooms that are used, the room reservations will be made by a travel service that will require a 10 percent commission.
Hint: Set up an equation for the amount received by the hotel without selling the room-days to Expedia equal to the amount received by the hotel by selling to Expedia, using three variables: the retail price of the room, the vacancy rate, and the number of rooms the hotel is considering selling to Expedia. Solve for the vacancy rate.
What is the minimum wholesale price discount that Expedia would accept from the hotel, such that Expedia would be indifferent between purchasing and reselling the rooms versus making reservations and receiving the 10 percent commission? Assume that Expedia can sell all the rooms it purchases.