What is the minimal hotel occupancy rate

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Reference no: EM133327547

Case: You own a motel with a hundred rooms. You have two options of managing it. First, if you do it yourself than fixed cost is $1000 (includes mortgage, staff salaries, maintenance) and variable cost per room is $10 per room per day (includes extra utility cost, room cleanup, etc). Assume $500 depreciation.

a) If you charge $50 per room, what is the minimal hotel occupancy rate (in terms of number of rooms) that results in positive net income?

b) At which point you won't have to supply additional cash to the project?

c) You have the second option of subcontracting to improve room quality and the surroundings, but that would increase fixed costs to $1800, with no change to variable costs and depreciation. You will, however, be able to charge $70 per room per day. At what point (in terms of number of rooms) will you be indifferent between both (independently vs subcontractor) modes of operation?

d) If the price-demand function for rooms is as follows: p(x) = 200 - 3*x with x- number of rooms sold, what price would you charge for a room? Assume FC = 1000 and VC/unit = 10 as in the original scenario. (Hint: If p(x) is price-demand function, the revenue function is R(x) = x*p(x), C(x) is the (variable and fix) cost function. The profit function is P(x) = R(x) - C(x). Your goal is profit maximization)

Reference no: EM133327547

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