Reference no: EM132815560

Question - The Prince Hotel closing the hotel with a $0 expected net income taking one of the two possible projects has 30 bedrooms and it charges guests at $200 per room per night. The hotel's variable cost is $50 per room per night. Fixed costs are budgeted at $1,645 per night. In normal circumstances, 90% of the rooms are occupied by guests every night. Due to the pandemic, over the last month, no room has been occupied. Hence, the managers are considering or as follows:

Project 1 - Family Day Package:

The hotel management could offer guests a 'Family Package', which includes two free tickets to an amusement park nearby for each night booked. As such, the hotel's variable cost will increase to $120 per room per night. The hotel will charge guests at $210 per room per night. Fixed costs are expected to remain the same. The managers estimate that 50% of the rooms would be occupied by guests.

Project 2 - Cost Reduction Strategy:

The hotel management could reduce costs by implementing a strict cost control. In doing so, the variable cost will decrease to $40 per room per night. The hotel will still charge guests at $200 per room per night. Fixed costs are expected to decrease to $820 per night. The managers estimate that 30% of the rooms would be occupied by guests as the economy has started to show signs of recovery.

Required -

1. Calculate the expected profit (or loss) per night for both projects based on the estimated number of rooms occupied by the guests.

2. Based on your answers above, indicate to the management of Prince Hotel, which is the best option: Project 1, Project 2 or closing the hotel.

3. Calculate the required sales in dollars to make a profit of $500 per night for both projects.