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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

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

Accept business at a special price for a service company

If you are not familiar with Priceline.com Inc., go to its website. Assume that an individual “names a price” of $85 on Pnceline.com for a room in Nashville, Tennessee, on August 22. Assume that August 22 is a Saturday, with low expected room demand in Nashville at a Marriott International, Inc., hotel, so there is excess room capacity. The fully allocated cost per room per day is assumed from hotel records as follows:

Housekeeping labor cost* $38
Hotel depreciation expense 43
Cost of room supplies (soap, paper, etc) 8
Laundry labor and material cost* 10
Cost of desk staff 6
Utility cost (mostly air conditioning) 5
Total cost per room per day $110

Both housekeeping and Laundry staff include many part-time workers so that the workload a variable to demand.

Should Marriott accept the customer bid for a night in Nashville on August 22 at a price of $85? Why or why not?

To determine

Accept Special Offer: Usually the acceptance of special offers by the business aims at utilizing the unused capacity of a business, so that the costs get reduced (as fixed costs are neglected) and additional revenue is generated.

To Determine: Whether Company M should accept the special offer.

Explanation

The cost involved for a room is $61, as only the variable costs are included. The fixed costs are neglected as this is a special offer business.

Housekeeping labor cost $38
Cost of room supplies $8
Laundry labor and material cost $10

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