A hotel management team is reviewing results for the current year and planning for next year. Current year summary financial data is as follows (in £):
Costs (fixed + variable) 3,200,000
Fixed costs 600,000
The total number of visitors (guest nights) for the current year is 50,000. For next year, management projects a 10% rise in variable costs, no change in fixed costs, and 50,000 guest nights. They have established a £1,000,000 profit target for the hotel.
a. Calculate total variable costs for the current year.
b. Calculate current year revenue, fixed cost, and variable cost per guest night.
c. Identify the current year break-even number of guest nights.
d. Calculate the required revenue per guest night for next year that will achieve the profit target.
e. Calculate the break-even number of guest nights for next year assuming the next year required revenue per guest night calculated in (d) above. If revenue per guest night next year is the same as the current year, how many guest nights are required to break-even?
f. Create a summary income statement for next year, assuming the revenue per guest night calculated in (d) above, showing fixed and variable costs separately. Identify contribution and calculate the contribution margin ratio.
g. A large client requests to contract for 10,000 guest nights for next year at a 20% discount to next years’ planned revenue per guest night calculated in (d) above. Calculate the per guest night contribution for this contract. Assuming the hotel has adequate capacity to service this contract, should they take it? What if taking the contract means foregoing 5,000 full paying guest nights?