Question

Empire Plaza Hotel is a luxury hotel with 400 rooms. Its regular room rate is \(300 per night per room. The hotel’s cost is \)165 per night per room and consists of the following.

Variable direct labor and material cost	\(40
Fixed cost	125
Total cost per night per room	\)165

The hotel manager received an offer to hold the Junior States of America (JSA) convention at the hotel in February, which is the hotel’s low season with an occupancy rate of under 45%. JSA would reserve 100 rooms for four nights if the hotel could offer a 50% discount, or a rate of \(150 per night. The hotel manager is inclined to reject the offer because the cost per room per night is \)165. Prepare an analysis of this offer for the hotel manager. Explain (with supporting computations) whether the offer from JSA should be accepted or rejected.

Short answer

Thespecial offer should be accepted by the manager.

Step-by-step solution

Meaning of Cost

In accounting, the term cost denotes the amount of money spent by a business concern in exchange or acquisition of goods or services. Costs are deducted from the revenues to compute thenet income generated by a business duringa particular period.

Preparation of analysis

Contribution Margin Analysis
Particulars	Amounts ($)
Room rate per night	$150
Less: Variable cost per night	$40
Contribution margin per night per room	$110
Number of rooms	100
Number of nights	4
Contribution margin from the special offer (110*100*4)	$44,000

Comment:

The contribution margin is positive even after providing a 50% discount to JSA during off-season; hence, the manager should accept this special offer.