Option 1: Accept Proposal Fixed Expenses

# of units 30 Depreciation 54700

Proposed Rate 40 Management Salaries 100000
Total Revenue 1200 Maintenance Salaries 36000
Insurance and Property Tax 22800

Employee Benefits 17953

Option 2: Reject Proposal Total fixed expenses 231453
# of units 7.5 7.5
Original Rate 80 Break/Even Point (in sales) 357,613.99
Total Revenue 600 Break/Even Point (in sales) 281,023.49

Margin of Safety 80,386.01

Margin of Safety - 62,023.49
 Variable Expenses
Fixed Cost (per night) Cleaning Wages 34180 Variable Cost (per night)
21.137260274 Pool Chemicals 2350
utilities including (internet) 74850
Cleaning and Laundry Supplies 12070
Maintenance Supplies and Expenses 11890
Interest Expenad and Bank Charges 19180
Total variable expenses 154520

Option 1
Option 2
Variable Cost (per night) 14.11142
Good Night Motel

What's the Big Issue?

An offer on the table to rent out the entire hotel at half the normal rate
Utilize
Sell make or buy
Purchase

What's the dilemma?

He has already booked 7 rooms + 8 rooms = 15 rooms booked

Analysis

Quantitative Analysis Qualitative Issues

Room- Rates
Room- Costs (fixed/variable)
Number of Rooms -> Available, Taken
Occupancy - Current, Expected

Situation
Take all rooms at 1/2 price $40/ night
Options for GNI
1) Take the deal
2) Reject the deal
3) Counteroffer

Cost Structure
Utilities normal - fixed extra- variable ($5) variable cost per roo 7.74
Salaries fixed
Wages - FT/ PT full-time/part-time (fixed)
Maintenance fixed
Cleaning variable 2.74
Supplies fixed
Advertising fixed
Interest Expenses fixed

Qualitative Issues
P/R issue if he cancels current people R the deal
Sets a precedent for reduced rates in year R the deal
Possibility of future business in slow times T the deal
Word spreads- other group events T the deal
Economy is slow so take cash if possible T the deal
Losing Business R the deal
 Look at contribution for each option:

Now (currently booked)

Revenue 2 nights x 30 (rooms available) x $80 x 0.25 (occupancy) 1200

Variable Costs
sup 2.74 x 2 nights x 30 x 0.25 41.1
heat 5x 2 nights x 30 x 0.25 75
Total 116.1
Contribution now 1083.9

The Deal
Revenue 2 nights x 30 rooms x 40 2400

Variable Costs
sup 2.74 x 30 x 2 164.4
heat 5 x 30 x 2 300
Total 464.4
Contribution Deal 1935.6
Incremental Profit 851.7

What does he need to B/E?

unit contribution (current process) 72.26

Units rented needed at full rate 26.7866 (approximately 27 rooms, 13/14/ night)
as a % 0.45
now 0.25 (25% occupancy)

difficult to rent out rooms due to seasonal trends, competitors offer similar rates
ooms, 13/14/ night)
Break-Even Analysis (Comparing two alternatives)

Not taking the Deal

Revenue
30 rooms x 0.25 occupancy x $80 room x 2 nights 1200

Variable Costs
Heating Costs
30 rooms x 0.25 occupancy x $5/room/night x 2 nights 75

Cleaning Costs
30 rooms x 0.25 occupancy x $2.74/room/night x 2 nights 41.1

Total variable costs 116.1

Contribution Margin 1083.9 Unit Contribution Margin

Taking the Deal

Revenue
30 rooms x $40/room x 2 nights 2400

Variable Costs
Heating Costs
30 rooms x 5 x 2 300

Cleaning Costs
30 rooms x 2.74 x 2 164.4

Total 464.4

Contribution Margin 1935.6

B/E Units 26.7866

72.26
Break- Even Analysis ( Comparing Two Deals)

Don't Take Deal Choice #1

Revenue
30 rooms x 0.25 occupancy x $80/night x 2 nights 1200

Variable Costs
Heating $5/room x 30 rooms x 0.25 occupancy x 2 nights 75
Cleaning Supplies $2.74/room x 30 rooms x 0.25 occupancy x 2 nights 41.1
Total Variable Costs 116.1

Contribution Margin 1083.9

Take Deal Choice #2

Revenue
30 rooms x $40/night x 2 nights 2400

Variable Costs
Heating $5/room x 30 rooms x 2 nights 300
Cleaning Supplies $2.74/room x30 rooms x 2 nights 164.4
Total Variable Costs 464.4

Contribution Margin 1935.6

B/E (Units) 26.7866

occupancy rate 0.446443 45% occupancy needed to break-even difficult due to seasonal trend of slow busine

Fixed Expenses Variable Expenses

Management Salaries 100000 Cleaning Wages 34180
Maintenance Salaries 36000 Cleaning/Laundry Supplies 12070
Employment benefits 17953 Pool Chemicals 2350
Insurance and Property Tax 22800 Maintenance Supplies and expenses 11890
Depreciation 54700 Interest expense and bank charges 19180
Total fixed expenses 231453 Utilities includng internet 74850
Total variable expenses 154520

B/E Sales (Don’t take the deal) 281023.5

B/E Sales (Take the deal) 357614

B/E sales only relevant if annual project

 Unit Contribution 72.26

Unit Contribution 22.26

onal trend of slow business and competitors offering similar prices

Variable Cost (unit) 14.11142