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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Accepting business at a special price for a service company

Cityscape Hotels has 200 rooms available in a major metropolitan city. The hotel is able to attract business customers during the weekdays and leisure customers during the weekend. However, the leisure customers on weekends occupy fewer rooms than do business customers on weekdays. Thus, Cityscape plans to provide special weekend pricing to attract additional leisure customers. A hotel room is priced at $180 per room night. The cost of a hotel room night includes the following:

  Cost per Room Night (at normal occupancy)
Housekeeping service $ 23
Utilities 7
Amenities 3
Hotel depreciation 55
Hotel staff (excluding housekeeping) 42
Total $130

a. What is the contribution margin for a room night if only the hotel depreciation and hotel staff are assumed fixed for all occupancy levels?

b. What should be considered in setting a discount price for the weekends?

a)

To determine

Product pricing: Product pricing is the method used for fixing a price for the products sold or the services offered to the consumers. The main aim of product pricing is to calculate the cost and the contribution margin, based on which the price is fixed.

Contribution Margin: Contribution Margin refers to the margin of profit expected by the company. The contribution margin is the difference between the selling price and the cost of the product.

To Calculate:  The contribution margin for a room night at Hotel C.

Explanation

Calculate the contribution margin for a room night.

Rate per room night $180.00
Variable Costs per room night:
     Housekeeping service $23.00
     Utilities $7.00
     Amenities $3...

b)

To determine

To Enlist:  The points to be considered for setting a discount during weekends.

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