Service Yield Pricing and Differential Analysis Cityscape Hotels has 200 rooms a

Question

Service Yield Pricing and Differential Analysis Cityscape Hotels has 200 rooms available in a major metropolitan city. The hotel is able to attract business customers during the weekdays and leisure customers during the weekend. However, the leisure customers on weekends occupy fewer rooms than do business customers on weekdays. Thus, Cityscape plans to provide special weekend pricing to attract additional leisure customers A hotel room is priced at $180 per room night. The cost of a hotel room night includes the following: Cost Per Room Night (at normal occupancy) Housekeeping service $ 23 Utilities Hotel depreciation Hotel staff (excluding housekeeping) Total The special weekend price is proposed for $120 per room night. At this price, it is anticipated that average occupancy for the weekend Friday, Saturday and Sunday will increase from 30% to 50% of available rooms. 42 $130 a. What is the contribution margin for a room night under the normal pricing if only the hotel depreciation and hotel staff (excluding housekeeping) are assumed fixed for all occupancy levels? b. Determine the contribution margin for a room night under the proposed weekend pricing

Explanation / Answer

Solution a:

Variable cost per room night = Housekeeping service + Utiliities + Amenities

= $23 + $7 + $3 = $33 per room night

Normal price per room night = $180

Contibution per room night under normal pricing = $180 - $33 = $147 per room night

Solution b:

Proposed weekend price per room night = $120

Contribution margin per room night under proposed pricing = $120 - $33 = $87 per room night

Solution c:

Solution d:

As there is net financial disadvantage of $360, therefore management should not accept the proposed weekend pricing plan.

Differential Analysis - Cityscape Hotel- Continue with existing plan (alt 1) or Execute the discount plan (Alt2) Particulars Continue with existing plan (alt 1) Execute the discount plan(alt 1) Differential effect on income (Alt 2) Amount Amount Revenue per weekend $32,400.00 $36,000.00 $3,600.00 Variable Cost per weekend: Housekeeping service $4,140.00 $6,900.00 $2,760.00 Utilities $1,260.00 $2,100.00 $840.00 Amenities $540.00 $900.00 $360.00 Total variable cost per weekend $5,940.00 $9,900.00 $3,960.00 Contribution margin per weekend $26,460.00 $26,100.00 -$360.00

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