Exercise 19-13 Variable cost analysis for a special order LO A1 Grand Garden is

Question

Exercise 19-13 Variable cost analysis for a special order LO A1 Grand Garden is a luxury hotel with 165 suites. Its regular suite rate is $220 per night per suite. The hotel’s cost per night is $145 per suite and consists of the following. Variable direct labor and materials cost $ 48 Fixed cost [($5,870,000/165 suites) ÷ 365 days] 97 Total cost per night per suite $ 145 The hotel manager received an offer to hold the local Bikers’ Club annual meeting at the hotel in March, which is the hotel’s low season with an occupancy rate of under 50%. The Bikers’ Club would reserve 45 suites for three nights if the hotel could offer a 50% discount, or a rate of $110 per night. The hotel manager is inclined to reject the offer because the cost per suite per night is $145. Required: Prepare an analysis of this offer for the hotel manager.

Explanation / Answer

Calculate incremental analysis :

Grand garden should accept the offer

Incremental revenue (45*110*3) 14850 Less: Incremental cost Variable cost (45*3*48) (6480) Incremental profit 8370

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