Practical Capacity| 2,500,000| 195| 35| 25| 60|
Normal Capacity | 2,500,000| 120| 57| 25| 82|
Master-budget Capacity | 2,500,000| 80| 86| 25| 111|
Additionally, if the costing department decided to recalculate the unit costs due to the loss of the “regular” customers, thus spreading the fixed cost over a smaller number of rooms, the price would rise and become increasingly uncompetitive; effectively a downward demand spiral.
Finally, the case states “As in the case of Pearson Travel, Impressa Reisen kept to its regular bid and did not depart from previous forecasts”, which indicates that in previous years both bids would have been accepted. Assuming that in the previous years, the occupancy rate matched the longer-term average of 60% (Normal Capacity), the total cost per room at €82, would have been below the bid price, and thus accepted. In summary, the choice of Master-Budget Capacity Utilization, especially in a year-of-crisis when fixed costs are spread across a...