# costing and leverage questions

Business 415 (4 questions) as per the questionRead Chapter Nine.� Complete the Chapter Case �Scenic Routes� on page 397, tasks 1-4.� Use the Unit 12 Assignment 3 dropbox to submit your answers.Note: Word or Excel can be used to complete this Project.� Just be sure to include your answers for all four tasks in a single document.Please answer as the questions has said , the picture of the question is attached below

Exam – Revision Package

Three Topics:

Forecasting demand
Costing and Leverage
Pricing

Forecasting demand
For theory

Slides 1-16

Forecasting Article 1

Forecasting article 2

For Application questions

Forecasting demand
By using the following data:

Week
Forecast
Actual

4
150
160

3
155
162

2
160
158

1
158
160

0
?

Forecast demand for the next period by using:

Weighted 4 weeks average with the following weights:
Week 4: 20%  X 160 = 32

Week 3: 20%  X 162 = 32.4

Week 2: 25%  X 158 = 39.5

Week 1: 35% X 160 =   56

Forecast for week 0   159.9

Two weeks moving average
(160+158)/2 = 159

Single Exponential Smoothing
a= (160-158)/ (160-158) = 1

Ft+1 = 158 + 1 x (160-158) = 160

By using the following data:

Week
Forecast
Actual

4
390
400

3
410
410

2
410
390

1
400
420

0
?

Forecast demand for the next period by using:

Weighted 4 weeks average with the following weights:
Week 4: 10%   X 400 = 40

Week 3: 15%  X 410 = 61.5

Week 2: 25%  X 350 = 97.5

Week 1: 50%  X 420 = 210

Forecast for week 0   409

Three weeks moving average
(420 + 390 + 410)/ 3 = 406.67

Single Exponential Smoothing
a= (410-400)/(420-400) = 0.5

Ft+1 = 400 + 0.5 x (420-400) = 410

Costing and Leverage
For theory

Slides 1-16

For Application questions

Costing and Leverage

Sands Motel has the following financial data:

Rooms Sold
Total Variable Costs
FixedCosts
Total Costs
Total Revenue
Operating Income (Loss)

2,000
\$  40,000
\$50,000
\$90,000
\$100,000
\$10,000

4,000 6,000
80,000 120,000
50,000 50,000
130,000 170,000
200,000 300,000
70,000 130,000

Assumptions:     The motel has only one type of rooms and one price per room.

Variable costs have a linear relationship with the volume of revenue.

Calculate the break-even in number of rooms
CM = S-VC = 50-20= 30

BE= FC/CM = 50,000/30 = 1,667 rooms.

Compute DOL at 4,000 and 6,000 units
DOL (4000) = 120,000/ (120,000-50,000) = 1.71

DOL (6000) = 180,000/(180,000-50,000) = 1.38

What can you say about the DOL at these two different levels?
At DOL of 4000 rooms the hotel will yield for 1% increase is revenue 1.71% increase in operating income. At DOL of 6000 rooms the increase in revenue drops to 1.38%. The company is moving from leveraged to conservative.
If the company is expecting sales to increase from 4,000 to 6,000 rooms they need to do something about the drop of the fixed cost per room and proposed ways to keep DOL above 1.38 and closed to the 4000 rooms level.
If the company is expecting sales to drop from 6,000 to 4,000 they need to propose way to decrease DOL from the expected 1.71 by increasing variable cost per room and decreasing the total fixed costs.

Cat Motel, operates its 50 rooms all year around and sells each one for €90. An investigation of the cost structure reviled the following costs:

Housekeeping fixed……..
\$150,000

Housekeeping variable….
\$5.40 per room

Executive salaries under contract……………………….
\$250,000

Room amenities……………
\$5.50 per room

Separate the expenses between fixed and variable cost per unit. Using this information and the sales price per unit of €90.

Compute the break-even point in units and in occupancy
CM = S-VC = 90 – (5.40 +5.50) = 79.10

BE units= 400,000/ 79.10 = 5057 Rooms

Occupancy % = 5057/( 365 x 50) x 100 = 27.71%

Calculate the DOL at a forecasted occupancy of 75%
Rooms sold = 50 x 75% x 365 = 13,688

DOL = CM/(CM-FC) = 1,082,720.8/(1,082,720.8-400,000)= 1.6

Pricing
For theory

Slides 1- 44

And the article:

Zhang and Bell (2012) Price fencing in the practice of revenue management

For Application questions

Assume that at Spartan Hotel for a price of £120 the demand is 150 rooms and for a price of £80 the demand is 250.
Calculate the slope of the response function?

Slope= D1 -D2/ P1 -P2   = (250-150)/ (£80-£120) =-2.5/£

Calculate the price elasticity of demand?
Ed = – [(150 – 250) / 250] / [(£120 – £80) / \$80] = 0.8

What can you say about the elasticity of demand?
Demand is inelastic. If price increase by 10% demand will decrease by only 8%.

A hotel (assumed to have only one room type and price) faces a maximum demand of 35’000 guests. The satiating price is \$ 450 and the incremental cost \$ 50 / guest. Assume that the willingness to pay of the visitors is distributed uniformly.Determine the Price-Response Function

m= D/P = 35,000/450 = 77.78

d(p) = 35,000 – 77.78p

Determine the optimal price for a room
P*= 35,000 + ( 77.78 X 50)/ (2 X 77.78) = \$250

How much annual revenue and contribution can the hotel expect at this price?
d(250) = 35,000- 77.78 x 250 = 15,555 rooms

Revenue = 15,555 x \$250 = \$3,888,750

Contribution = 15,555 x (\$250 – \$50) = 3,111,000

A resort faces a price response function of d (p) = 45’000 – 24p. Incremental cost is \$500.
Based on this information what is the optimal price?
P* = (45,000 + (24 x 500))/ (2 x 24) = 1,187.5

According to market surveys, there are another two segments of the market that would be willing to pay more than \$ 500 but less than the current optimum price found in part a) of this question. Assume now that the resort can define, based on the market surveys, specifically that the two segments are customers with w.t.p.≥ \$1’000 and customers with w.t.p.< \$1’000. Base on this information develop the price response function for each segment?
Segment 1  : d (p) = 45’000 – 24p   ( max demand 21,000)

Segment 2 : d (p) = 24’000 – 24p

What is the optimal price for each segment?
Segment 1 P* = (45,000 + (24 x 500))/ (2 x 24) = 1,187.5

Segment 2 P* = (24,000 + (24 x 500))/ (2 x 24) = 750

A resort faces a price response function of d (p) = 40’000 – 20p. Incremental cost              is \$800.

Based on this information what is the optimal price?
P* = (40,000 + (20 x 800))/ (2 x 20) = 1,400

According to market surveys, there are another two segments of the market that would be willing to pay more than \$ 800 but less than the current optimum price found in part a) of this question. Assume now that the resort can define, based on the market surveys, specifically that the two segments are customers with w.t.p.≥ \$1’200 and customers with w.t.p.< \$1’200. Base on this information develop the price response function for each segment?
Segment 1  : d (p) = 40’000 – 20p   ( max demand 16,000)

Segment 2 : d (p) = 24’000 – 20p

What is the optimal price for each segment?
Segment 1 P* = (40,000 + (20 x 800))/ (2 x 20) = 1,400

Segment 2 P* = (24,000 + (20 x 800))/ (2 x 20) = 1,000

The hotelier is interested to calculate the total revenue and total contribution if she charges the optimal price for each segment. Help her to calculate both numbers by using the result of b) and c).
Segment 1 : d (1400) = 40’000 – 20 X 14000= 12,000

Revenue = 12,000 x 1,400 = 16,800,000

Contribution  = 12,000 x (1,400- 800) = 7,200,000

Segment 2 : d (1000) = 24’000 – 20 X 10000= 4,000

Revenue = 4,000 x 1,000 = 4,000,000

Contribution  = 4,000 x (1,000- 800) = 800,000

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