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Variable cost analysis for a services company: Winter Palace

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Problem 6-4A: Variable cost analysis for a services company L.O. C3

Winter Palace is a luxury hotel with 150 suites. Its regular suite rate is $200 per night per suite. The hotel's
cost per night is $125 per suite and consists of the following.
Variable direct labor and materials cost $ 25
Fixed cost [($5,475,000/150 suites) ÷ 365 days] 100
Total cost per night per suite $ 125

The hotel manager received an offer to hold the local Rotary Club annual meeting at the hotel in March, which
is the hotel's low season with an occupancy rate of under 50%. The Rotary Club would reserve 40 suites for
three nights if the hotel could offer a 50% discount, or a rate of $100 per night. The hotel manager is inclined
to reject the offer because the cost per suite per night is $125. The manager believes that if 40 suites are
offered at the rate of $100 per night for three nights, the hotel would lose $3,000, computed as ($100 - $125)
× 40 suites × 3 nights.

Required:
(a) Prepare an analysis of this offer for the hotel manager. (Omit the "$" sign in your response.)
$
Contribution margin $

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Solution Summary

This post evaluates a special order situation. The concept is part of the CVP analysis. The students will learn how to make use of the method to take decisions for special order.

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Revenues = 100*40*3=12000
Variable Cost= 25*40*3=3000
Contribution margin = 9000

Thus, the deal would result in ...

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