C-3: Hotel Price
Core Issue Description
Le Centre Sheraton faces a few financial constrain currently: * Negative cash flow by $2 million last fiscal year.
* The coming year’s target on ROI is 12%.
* Le Centre Sheraton has $50 million mortgage at a floating interest rate and $4.2 million annual municipal taxes to pay. * The $25,000 daily allowance is understood as credit. It means the crew do not need to pay from their own pocket should the total charge is less than $25,000 per day, and Alitalia will pay for these bills on a weekly basis. There is an opportunity from Alitalia to contract 40 rooms for 365 days with a low room rate at $42 per night and a daily crew allowance $25,000. Bills will be paid on a weekly basis. This offer will provide guaranteed customer traffic therefore revenue and cash inflows weekly to Le Centre Sheraton is also guaranteed. However the trade off is the potential lost earnings by selling the 40 rooms at the rack rate $105 per night and the food & beverage revenue that goes with it. There will also be additional requirements and incremental expenses to serve the 40 rooms each day. In addition, the hotel needs to provide and distribute $25,000/day allowance to the crews, keep extra housekeeping staff so to satisfy the check-in and out time, manage the wake-up calls due to flight schedules change, and put additional front-desk clerk to handle Alitalia crew. Le Centre Sheraton figured out these extra service cost would be at the expense of the other guests who pay for the full rack rate. So the paradox here Georges Villedary needs to solve is whether to accept the one-year contract ($42 room rate for all 40 rooms) from Alitalia or reject it by hoping to sell them at $105 rate for 115 nights like the hotel did in last year. Alternative Comparison:
1. Key assumptions used in comparison:
* Using previous year’s sales data – 115 nights – for the coming year’s forecasting data. * The hotel’s previous experience tells me that the crew’s spending on food and beverages is minor, so I assume $0 food & beverages revenue from the crew if the hotel accepts the offer. * Need one additional front-desk clerk to handle the Alitalia crew if the hotel accepts the offer. * Food & beverage cost, front desk clerk cost, housekeeping, laundry and linen, utilities, and amenities are treated as variable costs. 2. Calculation and comparison:
The hotel is forecasted to have $613,200 room revenue next year by accepting the offer. It is $130,200 more room revenue than selling them at full rack rate. Table 1 shows the room revenue comparison between the two choices. However there will be no revenue on food & beverage from Alitalia. So the food & beverage opportunity cost is $138,000 to accept Alitalia’s offer. Below table 2 is the food & beverage revenue comparison. Table 1: Room Revenue Alternative:
Table2: Food & Beverage Revenue Alternative:
Variable costs such as Food & beverage cost, front desk clerk cost, housekeeping, laundry and linen, utilities, and amenities that come with the room usage are assembled in below Table 3. Apparently the variable cost to accept the offer is $49,311.9 more than selling them to regular guests. Table 3: Variable Cost Alternative
Finally, in calculate the margin contributed per year based on above cost and revenue assumptions, we come to the result that the Hotel will have $57,112 less margin contributed by accepting the offer from Alitalia. Table 4 shows the calculation. Table 4: Margin Contributed
Decision Making Analysis & Recommendations:
* Weekly basis analysis (cash flow vs. profitability): Because Alitalia customer will pay the Hotel on a weekly basis, so each week there will be a guaranteed $11,792/week minimum cash inflows to the hotel and $9,200 margin contributed per week. Table 5 shows the margin calculation. This is in the greatest favor of the Le Centre Sheraton’s negative cash flow situation....
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