Plotting and Correlating Cost Information

Question 3
The Hotel is due to have a refurbishment but rather than follow the current policy of simply replacing furnishings with a similar style you would like to investigate creating three discrete levels of accommodation to pitch specifically at the three clients groups which make up the Hotel's primary markets: business, tourist and special event clients.

You are proposing that 5 of the larger rooms in the 200 room Hotel would be themed for special events such as weddings, birthdays etc. In line with this, you are also proposing an increase in the quality and range of the complimentary products such a fruit bowl, drinks etc and will include butler service for these rooms. The business rooms will also have better quality products than tourist rooms and a business support person.

The Base room cost is for a standard room clean and service but depending on the type of room there will be a difference in other costs. Estimated costs for each of the room types is detailed below along with the budgeted cost limit.

Business Tourist Special Event Available budget
Complimentary products 55 20 65 5,400
Direct labour 10 7 12 1,550
Base room costs 50 50 50 10,000
Variable overhead 6 5 9 1,100
You have estimated the following prices per night for each of the room types. Due to limits on the number of guests who may access the business lounge at any time, a maximum of 40 business rooms can be sold per night.
Business Tourist Special Event
Selling Price $200.00 $160.00 $220.00
Required:
a) Formulate a linear programming model to determine the expected mix of packages to offer to maximise profit, showing all supporting calculations, and solve using a computer package (eg solver in Excel) to derive an optimum accommodation mix. (15 marks)
b) Comment on the solution, was it what you expected? Why or why not? (10 marks)

Question 4
Included in the staff tasks in the ORC is the job to set-up conferences, meetings and other small special events. An analysis of set-up costs indicates a reduction over time where similar corporate events are held which you have attributed to cost experience.
Required:
a) What is meant by the term 'cost experience'?
b) Explain what '80%' refers to when used in the term '80% cost experience curve'.
c) How would you determine the percentage value to apply?

Question 5
Employees of the Hotel are drawn from three categories permanent, part-time and casual. The labour cost has been used as the basis for overhead costs allocation as the overhead costs include a large proportion of human resource. The current method is to calculate overhead cost per dollar of labour cost based on last years cost data using the formula:
(Overhead cost)/(Labour cost) = $0.048 per labour cost dollar.

You have obtained the following data regarding overhead costs and labour activity from the past 12 months.

Month Number of Employees Labour Hours Labour Costs Overhead Costs
Jan 70 32,000 480,000 27,500
Feb 65 26,000 390,000 27,000
Mar 70 30,000 450,000 30,000
Apr 75 42,000 630,000 32,000
May 80 45,000 675,000 33,500
June 87 55,000 825,000 35,500
July 92 65,000 975,000 37,000
Aug 70 31,000 465,000 38,500
Sept 75 50,000 750,000 37,500
Oct 75 45,000 675,000 34,000
Nov 80 76,000 1,150,00038,600
Dec 80 65,000 975,000 36,500
562,000 8,440,000407,600
You are concerned that this method may not be appropriate and would like to present to the Board of Management a review of the current method.

Required:
a) Plot the data on overhead costs and labour costs? (5 marks)
b) Determine the cost equation for overheads using
i. Labour cost and the following methods (4 marks)
? High-low method
? Regression analysis

ii. Number of employees and the following methods (4 marks)

? High-low method

? Regression analysis
c) Comment on the effectiveness of each method. (5 marks)
d) Based on your findings above how should overhead be allocated, why? (7 marks)