Air Canada Contract
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Air Canada Contract
Our hotel has been requested to provide accommodation to the crew members of Air Canada. This contract is not a guaranteed one, which means that it has been pitched to 10 other hotels and based on an auction style layout would be awarded to the hotel with the lowest prices. For the analysis of the contract, Air Canada has provided us with information regarding the services they require and the maximum price they are willing to pay. Taking all this into account, the contract will last for 3 years with a high probability of Air Canada being a long term client. Therefore, it is essential for us to determine the benefit this contract has on our Net Incomes. Based on the maximum price Air Canada is willing to pay, I have analyzed the impact of accepting this contract and have made a number of assumptions. The income statements on our records provide us with enough budgeted data to compare our profitability over the next three years. For expenses, actual numbers have been used relating to the price increase of $65/room. I feel that these numbers portray the economic reality of the situation and provide us with a more accurate picture of the costs we incur.
A number of assumptions have also been made:
The month of March contains 31 days.
The high season for the hotel is from April to August (4 months). The rest of the months are low season.
Expenses attributed to the different hotel divisions have been computed on a per room and per meal basis respectively.
The cost of equity was not provided and therefore was assumed to be 5% – the same as the cost of debt.
Rooms Division
Expense Allocation Key (Daily Basis)
Rooms occupied 140 rooms (200 x 70% occupancy rate)
Expenses
Budget (75% Occupancy)
Actual (58% Occupancy)
Other
$4,490/150*31=$1.181
$3,996/3600 =$1.11
Wages
$23,250/150rooms@31nights=$5/rooms
$18,500/3600= $5.18rooms
Supplies:
9000/150rooms@31 = $1.94/room
7390/3600=$2.053/room/night
Linen
$13,500/150rooms@31days=2.9032
$13,542/3600=3.762
Telephone
$7,290/150/31=1.57/room/night
$5,832/3600=1.62
Based on the analysis presented in the above exhibit, we can see small discrepancies in the expenses. We therefore, assume the rates calculated through the actual data to conduct analysis for the Air Canada Contract.
In my analysis for revenues at different occupancy rates and prices, I deduced that telephone revenue was based on a fixed and variable income stream. The fixed revenues was based on the number of calls being made on average per night, while the variable income stream was based on the long distance minutes used per room.
Revenues
Budgeted – 75% Occupancy
Actual – 58% Occupancy
Fixed
150*31*$1 = $4650
116*31*$1=$3596
Variable
$3450/0.1*4650= 7.42min/room
2884/.1*3600 = 8 min/room
Based on the above analysis and cost drivers, Income statement for the Room Division has been recalculated with the following occupation rates – 70% low season, 85% high season and 70% high season.
Monthly
Occupancy
70%@$50
85%@$105
70%@$105
ACC 30%@$42
Room Revenue
217,000
553,350
455,700
78120
Basic Calls
4,340
5,270
Long Distance
3,472
Total Revenue
224,812
562,836
463512
81468
Expense
Maid Wages
22307.6
27687.8
22307.6
9560.40
Supplies
8910.02
10819.31
8910.02
3818.58
OC – Cash
12501
Desk Clerk
3080.162
Linen
16327.08
19825.74
16327.08
6997.32
Phone Rental
7030.80
8537.11
7030.80
3013.20
Manager Salary
10470
10470