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Homework answers / question archive / Laurentian Lodge case Laurentian Lodge Laurentian Lodge is a ski resort located in the picturesque Laurentian Mountains

Laurentian Lodge case Laurentian Lodge Laurentian Lodge is a ski resort located in the picturesque Laurentian Mountains

Accounting

Laurentian Lodge case Laurentian Lodge Laurentian Lodge is a ski resort located in the picturesque Laurentian Mountains. It is open only during the winter season spanning 20 weeks from November to March. The resort has 100 rooms, each with a spectacular view of the mountains. Each room rents for $160 per night during the season. The average occupancy rate is 90% during the season. All 100 rooms of the resort are closed down for the off-season. The lodge is operated by Hotel Management Corporation (HMC) which charges a fixed base amount of $100,000 annually for its management services. In addition, HMC charges a fee of $50 per room for every night it is kept open. This fee covers the costs of supervision, record-keeping, guest registration, concierge services, facility repairs and maintenance, marketing, insurance, heating and electricity, and telephone service. A further charge of $12 is paid to HMC for every night a room is occupied by a guest to cover maid and supplies expenses for cleaning rooms and replacing fresh linen and other amenities. The Laurentian Lodge also incurs an annual expense of $468,000 for depreciation of lodge building, equipment and furniture. The income statement for the most recent year is in Exhibit 1.
Laura Lee, the owner of the lodge, is concerned that she incurs expenses around the year without earning any revenues during the off-season. She would like to evaluate the possibility of keeping the lodge open during the off-season like some of the other hotel property she owns. Specifically, she wants to consider keeping 30 rooms in the north wing of the lodge open during the off-season at a reduced rate of $100 per room-night. She estimated that the average occupancy rate during the off-season would be about 80% with the reduced room rate of $100 as it would be attractive to couples interested in hiking on the © This case was prepared by Professors Rajiv Banker to provide a basis for class discussion. 1 mountain trails. HMC will charge an additional $1,000 per week for management services for every week the north wing of the lodge is kept open in the off-season. HMC will also continue its charge of $50 for every night a room is kept open and $12 for every night a room is occupied during the off-season. Required: 4. Determine the break-even point in terms of average room occupancy rate during the 32 weeks of off- season under Laura Lees proposal. 5. Determine the average room occupancy rate necessary to generate $3,000 profit before tax per week during the off-season under Laura Lees proposal. 6. What are the incremental costs if the lodge is kept open? Should the proposal to keep the lodge open be adopted?
Exhibit 1. Income Statement for the Year Ended March 31, 20X8 $ 2,016,000 Sales revenue (12,600 room-nights x $160) Expenses: Hotel Management Corp. charges: Annual fee Per room-night kept open (14,000 * $50) Per room-night occupied (12,600 x $12) Depreciation (straight-line method) Income before tax Income tax (@40%) Net income $ 100,000 700,000 151,200 $951,200 468,000 $ 1,419,200 $ 596,800 238,720 $ 358,080 = Total number of room-nights kept open 100 rooms x 7 days x 20 weeks = 14,000 room-nights Total number of room-nights occupied = 100 rooms x 7 days x 20 weeks 90% = 12,600 room-nights

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 Income Statement During Off Season If Occupancy rate is 80% considered)                                                          
1   Sales Revenue       (5376 room nights *$100)           537600                                      
   Expenses                                                          
   add maintenance fees           (32*1000)       32000                                      
   Per Room Night kept Open           (6720*$50)       336000                                      
   Per Room Night kept occupied           (5376*$12)       64512                                      
   Profit Before Tax                   105088                                      
   Tax @40%                   42035.2                                      
   Profit After tax                   63052.8                                      
                                                              
       Total Number of room Night Keft Open               (30 Rooms*32 Weeks*7 Days)                                      
                   =     6720 room nights                                      
                                                              
       Total Number of room Night Kept occupied               (30 Rooms*32 Weeks*7 Days*80%                                      
                   =   5376 Room nights                                      
                                                              
2. Break Even Point in terms of average room occupancy rate                                                          
   It is the pont where profit Before tax is Zero                                                          
Income Statement Duringg Off Season)                                                          
   (Lets assume that occupancy rate iss X%)                                                          
                                                              
   Sales Revenue       (6720*x% room nights *$100)           672000*x%                                      
   Expenses                                                          
   additional maintenance fees           (32*1000)       32000                                      
   Per Room Night kept Open           (6720*$50)       336000                                      
   Per Room Night kept occupied           (6720*x%*$12)       80640*x%                                      
   Profit Before Tax                   0                                      
                                                              
               672000*x%   =   32000+336000+80640*x%                                      
               X%   =   62.22%                                      
                                                              
                                                              
       Total Number of room Night Keft Open               (30 Rooms*32 Weeks*7 Days)                                      
                   =     6720 room nights                                      
                                                              
       Total Number of room Night Kept occupied               (30 Rooms*32 Weeks*7 Days*x%)                                      
                   =   6720*x%                                      
                                                              
       Thus if Occupancy rate is 62.22% there will be the break even point                                                      
                                                              
3       Calculation of average room Occupancy Rate necessary to generate 3000$ profit Each week during off season Weeks                                                      
       Therefore Profit  Before tax required will Be 3000*32weeks i.e. 96000                                                      
                                                              
   Income Statement Duringg Off Season)                                                          
   (Lets assume that occupancy rate is again X% whih will give us 3000$ each week                                                          
                                                              
   Sales Revenue       (6720*x% room nights *$100)           672000*x%                                      
   Expenses                                                          
   additional maintenance fees           (32*1000)       32000                                      
   Per Room Night kept Open           (6720*$50)       336000                                      
   Per Room Night kept occupied           (6720*x%*$12)       80640*x%                                      
   Profit Before Tax                   96000   Required or given                                  
                                                              
               672000*x%   =   96000+3200++336000+80640*x%                                      
               X%   =   78.46%                                      
                                                              
                                                              
       Total Number of room Night Keft Open               (30 Rooms*32 Weeks*7 Days)                                      
                   =     6720 room nights                                      
                                                              
       Total Number of room Night Kept occupied               (30 Rooms*32 Weeks*7 Days*x%)                                      
                   =   6720*x%                                      
                                                              
       Thus we an say that if 78.46% is ocupancy rate in off season the lodge will be able to generate 3000$ profit before tax each week                                                      
                                                              
   * Depreciation is ignored as it is fixed cost and will not be taken into consideration while calculating the occupancy rate , as this expenditure is fixed and will be occurred irrespective of the fact that lodge is open or not                                                          
                                                              
                                                              
                                                              
                                                              
4     YES IT IS DEFINITELY ADVISABLE To ADOPT THE PROPOSAL TO KEEP THE LODGE OPEN AS IT IS GIVING EXTRA PROFIT AND ALSO HELP IN OPTIMUM UTILISATION OF FIXED COST (Depreciation)   
   Additional cost incurred is( 32*1000$ + 50* per roomnight kept open+12*per room night kept occupied.)                                                          

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