Determine the minimum daily charge that must be assessed per suite per day to generate $240,000 of…
(CVP analysis; multiproduct) Ted Tyner owns Sixth Man Hotel, a luxury hotel with 60 two-bedroom suites for coaches and their players. Capacity is 10 coaches and 50 players. Each suite is equipped with extra-long king-sized beds, super-tall and extended shower heads, extra-tall bathroom vanities, a laptop, and a printer. Each suite has a Pacific Ocean view. Hotel services include airport limousine pickup and drop-off, a daily fruit basket, champagne on the day of arrival, and a Hummer for transportation. Coaches and players are interviewed about their dietary restrictions and room service requirements before arrival. The hotel’s original cost was $1,920,000, and depreciation is $160,000 per year. Other hotel operating costs include:
Labor
$320,000 per year plus $5 per suite per day
Utilities
$158,000 per year plus $1 per suite per day
Miscellaneous
$100,000 per year plus $6 per suite per day
In addition to these costs, costs are also incurred on food and beverage for each guest. These costs are strictly variable and (on average) are $40 per day for coaches and $15 per day for players.
a. Assuming that the hotel is able to maintain an average annual occupancy of 80 percent in both coach and player suites (based on a 360-day year), determine the minimum daily charge that must be assessed per suite per day to generate $240,000 of income before tax.
b. Assume that the per-day price Tyner charges is $240 for coaches and $200 for players. If the sales mix is 12:48 (12 coach days of occupancy for every 48 player days of occupancy), compute the following:
1. The break-even point in total occupancy days.
2. Total occupancy days required to generate $400,000 of income before tax.
3. Total occupancy days to generate $400,000 of after-tax income. Tyner’s personal tax rate is 35 percent.
c. Tyner is considering adding a massage service for guests to complement current hotel services. He has estimated that the cost of providing such a service would largely be fixed because all necessary facilities already exist. He would, however, need to hire five certified masseurs at a cost of $500,000 per year. If Tyner decides to add this service, how much would he need to increase his daily charges (assume equal dollar increases to coach and player room fees) to maintain the break-even point computed in (b)?