Majestic Lodge Case Study
Our present policy to keep the business closed during off-season has adverse effects on the profits that we make during season time. Our profit and loss statement for the year 2000 reveal that off the $160,800 revenue earned during the business season, $149,157 was paid out as total yearly expenditure leaving a profit of just $11,643. Thus Majestic Lodge is running a profit of mere 7.24% on its annual turnover. In order to remedy this situation I believe we ought to keep the property open to business even during the off-season. I further recommend investing in a heated swimming pool; this facility will undoubtedly attract visitors even during non skiing season.
I strongly believe that implementation of this recommendation will yield success since Majestic Lodge overlooks some of the most scenic spots of the mountain and the village and people would love to spend summer holidays in such pleasant setting. Initially we could implant this idea by keeping the 30 rooms of the west wing open for occupancy while the east wing remains closed. By implementing my recommendation I presume that we would have between 20%-40% occupancy for the 30 rooms of the west wings. However occupancy rate is bound to increase gradually over the years.
By committing $4000 dollars for advertising we will have a high probability of attaining 40% occupancy during off-season. It will be necessary to offer our services at a discount during the off-season months in order to get the have a favourable occupancy rate. I recommend that we offer I west wing rooms at $10 for single occupancy and $15 for double occupancy. In order to minimize the cost of operation we can work without most of the manpower that we usually employ during the business season. We may do without a clerk during the off- season and employ the services of only 2maids rather then the usual 4.
Additionally Mrs Kacheck agrees to work at $100 a week as compared to $140 a week which she is paid during seasonal months. So our total expenditure on manpower would increase by $12,480 inclusive of fringe benefits and other taxes. An additional expense of $2000 will be incurred towards maintenance and $500 for insurance if the west wing remains open round the year. The cost of utility (Electricity and Phone) will increase by an estimated $2340, cost of linen will presumably increase by $10,440 while cost of cleaning supplies will increase by $384.
The cost of running the west wing for 8 months would amount to $32,144. At an estimated 40% occupancy with 2:8 single versus double occupancy ratio and at discounted rates of $10 and $15 for single and double occupancy respectively we can expect increased revenue of $39,600. Thus the profit would be $7,456 which is 23.20% of our 8 monthly expenditure.. In order to produce better results we will have to target a higher occupancy rate, this will be possible only if we provide some sort of amusement to the customers, so building a heated swimming pool will serve the purpose of bringing in more customers.
The cost of construction the swimming pool would be $40,000 which requires to be depreciated over following 5 years. Additional annual expenses would include $6000 for life guard and guard,$3000 for maintenance and taxes and $1000 towards heating expenses. Thus the total annual expenses for the swimming pool would amount to $10,000. Providing a swimming pool as a part of service is becoming norm these days and we will soon have to include this facility as a part of our service. However it would not be feasible to incorporate the swimming pool as a part of service until we have attained an off-season occupancy rate of 60%.
Therefore I would recommend that we implement my proposal to keep the west wing open for business this year and we need to offer our services at a market penetration prices of $10 and $15 for single and double occupancy respectively, for following two years. Once we attain 50% of total occupancy (including east wing and west wing), we can then consider the option upgrading our facilities by investing in a swimming pool. Appendix Comparision of the profit and loss statement for 2000 with estimated profit and loss statement after incorporating Mr. Kacheck’s proposal.