Many companies, especially in the travel industry (airlines, hotels, and so on)

Question

Many companies, especially in the travel industry (airlines, hotels, and so on) have so-called loyalty programs offering members benefits that depend on the frequency of purchase, miles traveled, or amount of money spent among other measures. One example is upgrades to a better seat or to a better room, for the same price as a regular seat or regular room. Such upgrades are generally based on availability, meaning the hotel or airline does not believe it will sell the room or seat. What, if anything, does such an upgrade cost the hotel or airline? Would these costs show up in the accounting records? Explain.

Explanation / Answer

Any kind of upgrades made based on availability of opportunity cost, also known as alternative cost, it is the value (not a benefit) of the choice in terms of the best alternative while making a decision. A choice needs to be made between several mutually exclusive alternatives; assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would have been had by taking the second best available choice.

Here the upgrade assumes to be happen only when the hotel or airline does not believe that it will sell the room or seat. Hence the decision depends upon happening of the best alternative choice.

These costs are not shown in books.However such computation is important in decision making for management purposes.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.