Question

Grand Garden is a luxury hotel with 150 suites. Its regular suite rate is \(250 per night per suite. The hotel’s cost per night is \)140 per suite and consists of the following.

Variable direct labor and material cost	\(30
Fixed cost	110
Total cost per night per suite	\)140

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 50 suites for three nights if the hotel could offer a 50% discount, or a rate of \(125 per night. The hotel manager is inclined to reject the offer because the cost per suite per night is \)140. Prepare an analysis of this offer for the hotel manager. Explain (with supporting computations) whether the offer from the Bikers’ Club should be accepted or rejected.

Short answer

The managershould accept the offer from Bikers’ Club.

Step-by-step solution

Meaning of Contribution Margin

Contribution margin refers to the profit left in the hands of a business entity after recovering all its variable costs from the sales revenue. It is computed by taking the difference betweenselling price per unit and variable cost per unit.

Preparation of analysis

Contribution Margin Analysis
Particulars	Amounts ($)
Room rate per night	125
Less: Variable cost per night	(30)
Contribution margin per night per suite	95
Number of suites	50
Number of nights	3
Contribution margin from special order (95*50*3)	$14,250

Comment:

The contribution margin is positive even after providing discounted rates to the bikers’ club during off-season; hence, the manager should accept this special offer.