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Accounting for Decision Making Case Study Assignment

Learning Outcomes

a) Explain and evaluate the role and importance of financial information in business decision making

b) Apply relevant accounting concepts to simple business scenarios

c) Apply basic costing and budgeting techniques to business decision making

d) Apply capital budgeting techniques to capital investment scenarios

Crystal Hotel Case Study

Crystal Hotel Pty Ltd introduced in Part A of the Case Study has a quite flat organizational structure as per the chart below. The General Manager oversees each departmental manager directly.

Sales and Marketing Department Assessment

As per information provided in part A of the case study, the owners of the Crystal Hotel are planning to renovate and refurbish the hotel. A part of the redevelopment plan is to build a Wellness Centre on the rooftop of the hotel. The Sales and Marketing Manager volunteered to help with this project. He is a strong believer that it would bring the hotel up to the next level and also that it would attract additional customers to the hotel.

Due to the location of the hotel being within a close proximity to the business district of Pa ramatta, he believes that the Wellness Centre should be opened to external clients as well. He suggests employing a full time, in-house trainer and a part-time dietician. He believes selling monthly membership including training sessions and dietary advice will attract additional clients who may then promote the hotel to their employers for accommodation and other business related services.

The marketing manager wants to be well prepared to support the Wellness Centre project and needs help with few tasks from your team.

TASK 1 -

As part of the Wellness Centre Project, the plan is to build a small gym on the rooftop of the hotel. You have been appointed to help the Sales and Marketing manager to make decision whether to rent or buy specific equipment items. The required items are included in Appendix 1 together with costing information.

The budget for the required equipment is $45,550 for the life of the equipment. The useful life of the equipment is predicted to be 3 years after which it will need to be replaced. At the end of its useful life, it is expected to be sold for the residual value of 5% of its original cost. From the renting options, choose the one that is the most beneficial for the business. The rent is expected to rise by 3% each year. The rent is paid at the beginning of each period. Servicing of the equipment is included in the rent price. Assume that servicing its own equipment will cost the hotel additional $600 every year over the period of its useful life. Assume that servicing is done at the end of each year. Ignore GST for the purpose of this assessment task.

REQUIRED - The manager would like to know whether it would be better for the Hotel to buy the required equipment or to rent it. Explore both options and make a recommendation. Take into account the time value of money at the discount rate of 8%. Base your decision on the total cost of the specified equipment, not on an item by item basis.

TASK 2 -

The Sales and Marketing Manager has an idea of creating monthly memberships for external visitors that he would like to explore further. He is thinking to create two types of membership options. A Basic Membership which would include access to the gym, sauna and pool and it would cost clients $40 a week. A Full Package Membership would additionally to the access include a one hour weekly session with the in house personal trainer and a dietician consultation once a month. Clients would pay $81 per week for this type of membership.

He believes that an initial investment into promoting the centre would be $35,350 and subsequent cost of continuous promotion would be $808 a month. At the beginning he would like to make the service more exclusive and cap the membership to 20 basic membership clients and 30 full package membership clients. He wants to create a feeling of exclusivity amongst the clients.

Based on his calculations he believes offering the membership to the external clients would generate total revenue of $137,360 in the first year increasing by 10% every year after that. The in-house trainer is expected to cost the hotel $5555 a month and the services of dietician additional $1515 and both are expected to increase by 3% each year.

REQUIRED - Calculate the net present value of the external membership project over the next 3 years period. Use yearly basis for your calculations. The estimated cost of capital for the hotel is 8%. Assume 30% company tax in Australia when determining the values of the after tax net cash flow for each year.

TASK 3 -

Once the Crystal Hotel Wellness Centre is ready for opening, it will need to be promoted to existing and potential new clients. There is already an opening event (luncheon) planned which is handled by the Functions and Events Department. The overall budget for promoting the opening of the centre is $35,350. The opening luncheon is budgeted to cost $20,200.

Your team has been appointed to plan additional promotional activities for the remaining $15,150. The budget is aimed for the promotion of the opening of the centre only. Continuous promotional activities as well as online advertising will be handled separately.

Initial research has been done by the marketing team and the promotional activities to be considered are listed in the Appendix 3. Negotiated pricing has been included as well.

REQUIRED - Your task is to choose suitable promotional activities from the list provided to you and create a promotional budget for the Crystal Hotel Wellness Centre opening. Use the budget template provided in the excel file and adjust it as appropriate. Use Excel formulas to calculate your values. The final budget is to be included in the business report as well.

TASK 4 -

Marketing team has suggested Crystal Hotel to run a promotion. They are charging $80 per person for one night's accommodation including breakfast. The variable cost per person is $35 which includes food, cleaning and utilities. Fixed costs are $45, 000 per year which include council rates rate, water rates and land taxes.

REQUIRED - They have asked for your expertise to carry out a CVP analysis for this promotion. Calculate the following:

1. The contribution margin per unit of service (a unit of service is one night's accommodation for one guest).

2. The contribution margin ratio.

3. The annual break-even point in units of service and in dollars of service revenue.

4. The number of units of service required to earn a target net profit of $ 100, 000 for the year (ignore income taxes).

5. Analysis the importance of CVP analysis and comment on effectiveness of this promotion based on your calculations.

Only do task 2-3 of Sale & marketing department.

Attachment:- Assignment Files.rar