This case study is set in 2012 in rural Vermont.

This case study is set in 2012 in rural Vermont.

This case study is set in 2012 in rural Vermont.

MountainLodge

This case study is set in 2012 in rural Vermont. The MountainLodge is an old, but
well-maintained property that has changed ownership several times over the
years. It has no restaurant or bar. It is positioned as a mid-price, good quality
“destination” resort hotel.

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The MountainLodge
is open only during the skiing season.
It opens on December 2 and closes the last day of March. The mountain that it serves operates on a
permit from the state which allows only 120 days of operation per year. Each of the 50 rooms in the east wing rents
for $15 for single occupancy or $20 for double occupancy. The west wing of the hotel has 30 rooms, all
of which have spectacular views of the skiing slopes, the mountains, and the
village. Rooms in this wing rent for $20
and $25 for single or double occupancy, respectively. The average occupancy rate during the season
is about 80% (typically, the Hotel is full on weekends and averages 50 to 60
rooms occupied on week nights). The
ratio of single versus double occupancy is 2:8; on average.

Operating
results for the last fiscal year are shown in Exhibit 1. Mr. Krachit, the manager of the hotel, is
concerned about the off-season months, which show losses each month and reduce
the high profits reported during the season.
He has suggested to the owners, who acquired this hotel only at the end
of the 2011 season that to reduce the off-season losses, they should agree to
keep the west wing of the hotel operating year-round. He estimates the average occupancy rate for
the off-season to be between 20% and 40% for the next few years. Krachit estimates that with careful attention
to the off-season clientele a 40% occupancy rate for the 30 rooms during the
off-season would be much more likely if the owners would commit $4,000 for
advertising each year ($500 for each of eight months). There is no evidence to indicate that the 2:8
ratio of singles versus doubles would be different during the remainder of the
year or in the future. Rates, however,
would have to be drastically reduced.
Present plans are to reduce them to $10 and $15 for singles and doubles.

The
manager’s salary is paid over 12 months.
He acts as a caretaker of the facilities during the off-season and also
contracts most of the repair and maintenance work during that time. Using the west wing would not interfere with
this work, but would cause an estimated additional $2,000 per year for repair
and maintenance.

Mrs. Krachit
is paid $20 a day for supervising the maids and helping with check-in. During the season, she works seven days a
week. The regular desk clerk and each
maid are paid on a daily basis at the rate of $24 and $15 respectively. The payroll taxes and other fringe benefits
are about 20% of the payroll. Although
depreciation and property taxes would not be affected by the decision to keep
the west wing open, insurance would increase by $500 for the year. During the off-season, it is estimated that
Mr. and Mrs. Krachit could handle the front desk without an additional
person. Mrs. Krachit would, however, be
paid for five days a week.

The
cleaning supplies and half of the miscellaneous expenses (room supplies) are
considered a direct function of the number of rooms occupied. The other half of the miscellaneous expenses
are fixed and would not change with 12-month operation. Linen is rented from a supply house and the
cost also depends on the number or rooms occupied, but is twice as much, on
average, for double occupancy as for single occupancy. The utilities include two items: telephone and electricity. There is no electricity expense with the
motel closed. With the motel operating,
electricity expense is a function of the number of rooms available to the
public. Rooms must either be heated or
air-conditioned. The telephone bills for
each of the four seasonal months were as follows:

80 Telephones @
$3.00/month $240
Basic Service
Charge 50
$290

During the off-season, only the basic service charge is
paid. The monthly charge of $3 is
applicable only to active telephones.

An additional aspect of Mr. Krachit’s proposal is that a
covered and heated swimming pool be added to the hotel. Mr. Krachit believes that this would increase
the probability that the off-season occupancy rate would be above 30%. Precise estimates are impossible. It is felt that although the winter occupancy
rate will not be greatly affected by adding an indoor pool, eventually such a
pool will have to be built to stay even with the competition. The cost of such a pool is estimated to be
$40,000. This amount could be
depreciated over five years with no salvage value ($15,000 of the $40,000 is
for a plastic bubble and the heating units, which would be used nine months of
the year). The only other costs
associated with the swimming pool are $400 per month for a lifeguard, required
by law during the busy hours; additional insurance and taxes, estimated to be
$1,200; heating cost of $1,000; and a yearly maintenance cost of $1,800. If the pool is covered, a guard is needed for
12 months. If it is not covered, a guard
is needed only for three summer months (from June 15 to September 15, the
warmest period of the year), and there would be no heating expense.

EXHIBIT 1
MountainLodge
Operating
Statement, For the Fiscal Year ended 3/31/12

Revenues $160,800
Expenses
Salaries
Manager $15,000
Manager’s
Wife 2,400
Desk
Clerk 2,880
Maids
(four) 7,200
$27,480
Payroll Taxes
and Fringe
Benefits 5,496
Depreciation
(15 year life) 30,000
Property
Taxes 4,000
Insurance 3,000
Repairs and
Maintenance 17,204
Cleaning
Supplies 1,920
Utilities 6,360
Linen Service 13,920
Interest on
Mortgage
(5% interest rate) 21,716
Miscellaneous
Expenses 7,314
Total Expenses 138,410
Profit before Federal Income Taxes $22,390
Federal
Income Taxes (48%)
10,747
Net Profit $11,643

ASSIGNMENT REQUIREMENTS TO BE INCORPORATED
INTO CASE SOLUTION/RESPONSE:
·
Identify and summarize the background, key facts
and important issues involved in the case study. (Introduction)
·
On average, how many rooms must be rented each
night in season for the hotel to breakeven
·
The hotel is full on weekends in the ski
season. If all room rates were raised $5
on weekend nights, but occupancy fell to 72 rooms instead of 80, what is the
revised profit before taxes for the year, per Exhibit 1?
·
What is the proposed incremental contribution
margin per occupied room/day during the off-season?
·
For each decision alternative calculate the
occupancy rate necessary to break- even
on the incremental annual expenses.
·
What alternative do you recommend? Why?
(Conclusion)

Submission: Word document with excel
calculations embeddedinto Word
document. Submitted through SafeAssign on UBLearns. Therefore, submit just one
WORD document. Your submission should be in essay form incorporating each of
the bullets listed above.

 

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