Question

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 20 properties with an average of 200 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 70 percent, based on a 365-day year. The average room rate was $192 for a night. The basic unit of operation is the “night,” which is one room occupied for one night.

The operating income for year 1 is as follows:

HomeSuites
Operating Income
Year 1
Sales revenue
Lodging	$	138,030,000
Food & beverage		24,528,000
Miscellaneous		12,264,000
Total revenues	$	174,822,000
Costs
Labor	$	54,110,000
Food & beverage		15,330,000
Miscellaneous		10,220,000
Management		2,506,000
Utilities, etc.		40,000,000
Depreciation		10,000,000
Marketing		25,060,000
Other costs		8,006,000
Total costs	$	165,232,000
Operating profit	$	9,590,000

In year 1, the average fixed labor cost was $406,000 per property. The remaining labor cost was variable with respect to the number of nights. Food and beverage cost and miscellaneous cost are all variable with respect to the number of nights. Utilities and depreciation are fixed for each property. The remaining costs (management, marketing, and other costs) are fixed for the firm.

At the beginning of year 2, HomeSuites will open five new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 70 percent. Management has made the following additional assumptions for year 2:

• The average room rate will increase by 5 percent.
• Food and beverage revenues per night are expected to decline by 20 percent with no change in the cost.
• The labor cost (both the fixed per property and variable portion) is not expected to change.
• The miscellaneous cost for the room is expected to increase by 25 percent, with no change in the miscellaneous revenues per room.
• Utilities and depreciation costs (per property) are forecast to remain unchanged.
• Management costs will increase by 8 percent, and marketing costs will increase by 10 percent.
• Other costs are not expected to change.

The managers of HomeSuites are considering different pricing strategies for year 2. Under the first strategy (“High Price”), they will work to maintain an average price of $222 per night. They realize that this will reduce demand and estimate that the occupancy rate will fall to 60.0 percent with this strategy. Under the alternative strategy (“High Occupancy”), they will work to increase the occupancy rate by lowering the average price. They estimate that with an average nightly rate of $182, they can achieve an occupancy rate of 80 percent. The current estimated profit is $118,854,770.

Required:

a. Prepare a budgeted income statement for year 2 if the “High Price” strategy is adopted. (Round your per unit average cost calculations to 2 decimal places.)

b. Prepare a budgeted income statement for year 2 if the “High Occupancy” strategy is adopted. (Round your per unit average cost calculations to 2 decimal places.)

c. Which is the correct pricing strategy for year 2.

Answer 1