Concept explainers
Prepare Budgeted Financial Statements: Comparing Alternatives
Refer to the data in Problem 13-55. The managers of HomeSuites are considering different pricing strategies for year 2. Under the first strategy (“High Price”), they will work to maintain an average price of $210 per night. They realize that this will reduce demand and estimate that the occupancy rate will fall to 60 percent with this strategy. Under the alternative strategy (“High Occupancy”), they will work to increase the occupancy rate by lowering the average price. They estimate that with an average nightly rate of $170, they can achieve an occupancy rate of 80 percent.
For either of the two strategies, all the other estimates (cost per night, property costs, and so on) will be the same as in Problem 13-55.
Required
- a. Prepare a
budgeted income statement for year 2 if the “High Price” strategy is adopted. - b. Prepare a budgeted income statement for year 2 if the “High Occupancy” strategy is adopted.
- c. Make a recommendation to management for a pricing strategy for year 2. Explain your reasons.
a.
Prepare a budgeted income statement for year 2 if the “High Price” strategy is adopted.
Explanation of Solution
High price strategy:
Under the high-price strategy, the company keeps the price of the product higher than its competitors. High-price strategy helps the company to achieve higher profit as the sales price is higher.
Prepare a budgeted income statement:
Company H Budgeted Income Statement For year 2 | ||
Particulars | Amount | Total amount |
Sales revenue (1): | ||
Lodging | $165,564,000 | |
Food & beverage | $15,768,000 | |
Miscellaneous | $7,884,000 | |
Total revenue | $189,216,000 | |
Operating costs: | ||
Labor (4) | $46,620,000 | |
Food & beverage (1) | $14,191,200 | |
Miscellaneous (1) | $11,826,000 | |
Management (2) | $2,700,000 | |
Utilities (3) | $45,000,000 | |
Depreciation (3) | $12,600,000 | |
Marketing (2) | $27,500,000 | |
Other costs | $8,000,000 | |
Total operating cost | $168,437,200 | |
Operating profit | $20,778,800 |
Table: (1)
Thus, the operating profit is $20,778,800 for company H for year 2.
Working note 1:
Calculate the revenue and costs for year 2:
Particulars |
Total nights in a year 2 (8) (a) |
Cost per night (5) (b) |
% change (c) |
Total amount |
Sales revenue: | ||||
Lodging | 788,400 | 210 | - | $165,564,000 |
Food & beverage | 788,400 | $25 | 0.8 | $15,768,000 |
Miscellaneous | 788,400 | $10 | - | $7,884,000 |
Costs: | ||||
food & beverage | 788,400 | $18 | - | $14,191,200 |
Miscellaneous | 788,400 | $12 | 1.25 | $11,826,000 |
Table: (2)
Working note 2:
Calculate the management and marketing costs:
Particulars |
Amount (a) |
% change (b) |
Total amount |
Costs: | |||
Management | 2,500,000 | 1.08 | 2,700,000 |
Marketing | 2,500,000 | 1.1 | 2,750,000 |
Table: (3)
Working note 3:
Calculate the utilities and depreciation:
Particulars |
Amount (a) |
Number of property in year 1 (b) |
Cost per property |
Number of property in year 2 (d) |
Total cost in year 2 |
Costs: | |||||
Utilities | $3,750,000 | 15 | $250,000 | 18 | $4,500,000 |
Depreciation | $1,050,000 | 15 | $70,000 | 18 | $1,260,000 |
Table: (4)
Working note 4:
Calculate the labor cost:
Particulars |
Cost per property (a) |
Number of property (b) |
Total nights in a year 2 |
Variable labor cost per night (d) |
Total variable cost |
Total cost |
Labor cost | $400,000 | 18 | $7,200,000 | 788,400 | $39,420,000 | $46,620,000 |
Table: (5)
Working note 5:
Particulars |
Amount (a) |
Total nights in a year (7) (b) |
Cost per night |
Revenue: | |||
Food & beverage | $19,162,500 | 766,500 | $25 |
Miscellaneous | $7,665,000 | 766,500 | $10 |
Costs: | |||
Food & beverage | $13,797,000 | 766,500 | $18 |
Miscellaneous | $9,198,000 | 766,500 | $12 |
Table: (6)
Working note 6:
Calculate the average variable cost per unit:
Particulars |
Total fixed labor cost (a) |
Labor cost for year 1 (b) |
Net labor cost |
Total nights in a year (d) |
Cost per night |
Labor cost | $6,000,000 | $44,325,000 | $38,325,000 | $766,500 | $50 |
Table: (7)
The fixed labor cost per property is $400,000, and there are 15 properties so the total fixed labor cost will be $6,000,000
Working note 7:
Calculate the number of nights for year 1:
Number of properties (a) |
Number of rooms in each property (b) |
Days in a year (c) |
Occupancy rate (d) |
Total nights in a year |
15 | 200 | 365 | 70% | 766,500 |
Table: (8)
Working note 8:
Calculate the number of nights for year 2:
Number of properties (a) |
Number of rooms in each property (b) |
Days in a year (c) |
Occupancy rate (d) |
Total nights in a year |
18 | 200 | 365 | 60% | 788,400 |
Table: (9)
b.
Prepare a budgeted income statement for year 2 if the “High Occupancy” strategy is adopted.
Explanation of Solution
High occupancy strategy:
Under the high-occupancy strategy, the company is very optimistic about the occupancy of the room. It estimates the highest probability of occupancy rate. Higher occupancy rate helps in increasing sales because the number of units sold has increased.
Prepare a budgeted income statement:
Company H Budgeted Income Statement For year 2 | ||
Particulars | Amount | Total amount |
Sales revenue (9): | ||
Lodging | $178,704,000 | |
Food & beverage | $21,024,000 | |
Miscellaneous | $10,512,000 | |
Total revenue | $210,240,000 | |
Operating costs: | ||
Labor (10) | $59,760,000 | |
Food & beverage (9) | $18,921,600 | |
Miscellaneous (9) | $15,768,000 | |
Management (2) | $2,700,000 | |
Utilities (3) | $45,000,000 | |
Depreciation (3) | $12,600,000 | |
Marketing (2) | $27,500,000 | |
Other costs | $8,000,000 | |
Total operating cost | $190,249,600 | |
Operating profit | $19,990,400 |
Table: (10)
Thus, the operating profit is $19,990,400 for company H for year 2.
Working note 9:
Calculate the revenue and costs for year 2:
Particulars |
Total nights in a year 2 (11) (a) |
Cost per night (5) (b) |
% change (c) |
Total amount |
Sales revenue: | ||||
Lodging | 1,051,200 | 170 | - | $178,704,000 |
Food & beverage | 1,051,200 | $25 | 0.8 | $21,024,000 |
Miscellaneous | 1,051,200 | $10 | - | $10,512,000 |
Costs: | ||||
food & beverage | 1,051,200 | $18 | - | $18,921,600 |
Miscellaneous | 1,051,200 | $12 | 1.25 | $15,768,000 |
Table: (11)
Working note 10:
Calculate the labor cost:
Particulars |
Cost per property (a) |
Number of property (b) |
Total fixed cost |
Total nights in a year 2 (d) |
Total variable cost |
Total cost |
Labor cost | $400,000 | 18 | $7,200,000 | 1,051,200 | $52,560,000 | $59,760,000 |
Table: (12)
Working note 11:
Calculate the number of nights for year 2:
Number of properties (a) |
Number of rooms in each property (b) |
Days in a year (c) |
Occupancy rate (d) |
Total nights in a year |
18 | 200 | 365 | 80% | 1,051,200 |
Table: (13)
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Chapter 13 Solutions
FUND. OF COST ACCOUNTING ACCESS >I<
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