Hannah Turnbull manages Elegant Suites, a hotel in a small town 10 miles inland from Florida’s beautiful gulf coast. Elegant Suites has a capacity of 320 suites and offers a small, but well managed, conference center. Since opening, Elegant Suites has established a good reputation among small and medium-sized business clients as a nice place to hold annual meetings and retreats.
Hannah currently is in a quandary regarding hotel bookings for the last weekend in February.
One of Elegant’s long-standing clients, Piedmont Publishing, recently called Hannah about the possibility of holding its annual three-day sales conference at the end of February. Piedmont wants to reserve 75 rooms each day (= 225 total room days). Per its usual arrangement, Piedmont would pay $120 per day per room and $5,000 per day for use of the convention center. Because this is a bulk booking, the room rate is lower than the normal rate of $150 per day. Like all clients, however, the Piedmont attendees would spend additional money at the hotel. Hannah expects this miscellaneous expenditure to be $25 per person per day.
Shortly after receiving the call from Piedmont, Hannah received a call from Capelli Fashion Designers. Capelli, a prospective first-time client, wants to hold its annual three-day fashion event at Elegant Suites at the end of February. Capelli would book 225 suites per day (for a total of 675 room days) and is willing to pay $120 per suite per day. Also, Capelli would be willing to pay the normal daily rate of $5,000 for use of the convention center, although it wants Hannah to construct a runway at a cost of $3,000. Hannah was ecstatic to receive the Capelli call until she realized that the dates Capelli wants coincide with Piedmont’s annual sales meeting.
Trying to figure a way out, Hannah calls both Capelli and Piedmont to see if either party would be willing to move its event to different dates. However, both Capelli and Piedmont are committed to holding their respective events at the end of February. Next, Hannah looks at her reservations chart to see if she can hold both events. She realizes that 60 suites already are committed to other individual clients during that time. Hannah believes strongly that she must honor these reservations.
Hannah provides you with the following summary financial data for a typical month of operations.
Summary Financial Data for a Typical Month of Operations
Number of occupied suite-days (approx. 60%
occupancy) 6,000
Average Suite rate $130
Revenues:
Suites $780,000
Convention Center 75,000
Food, telephone, movies, and other incidentals 150,000
Total Revenues $1,005,000
Variable costs:
Food, laundry, supplies, telephone, and movies $180,000
Labor (kitchen help, cleaning staff) 210,000
Contribution margin $615,000
Fixed costs:
Labor (hotel management) $125,000
Building and Grounds 350,000
Profit before taxes $140,000
Hannah also informs you that if she stays with Piedmont, she is likely to sell another 57 suites to individual parties for each of the three days at the standard rate of $150 per suite. If she accepts Capelli, she will be able to sell the remaining 35 suites to individual parties for each of the three days at the standard rate of $150 per suite. However, as booking Capelli would cause an abnormally high occupancy rate (100%), Hannah anticipates the need to pay her hourly staff an overtime premium of 50% for the three-day period (i.e., the average hourly wage will be the base wage u 1.50).
Required
a. Identify Hannah’s decision options.
b. Identify Hanna’s best option.
c. Suppose 75 and 225 suites per day is the number of suites that Piedmont and Capelli wish to block for their conventions. However, the actual demand might be less than this estimate.
While Piedmont is sure to occupy at least 60 suites, Capelli estimates that total demand might range from 150 to 225 suites. Because actual demand would not be known till late, Hannah would not be able to fill unused suites with paying guests. How might this information affect Hannah’s decision?
d. Considering long-term implications, what should Hannah do?