Accounting for Decision Making: Case Study Report-Crystal Hotel
Option 1: Sales and Marketing Department Assessment
Executive Summary:
The case study of the Crystal Wellness Center is approved and recommended to be implemented after conducting the assessment related to its marketing and promotional activities. It is thus recommended that the Crystal hotel should rent the equipment for the gym to remain well below its budget for the types of equipment. This is shown by evaluating the rent and the purchasing of gym equipment, showing that the equipment rented would be cheaper. Similarly, the net present value of the cash outflows and the inflows of the memberships in the wellness center are also evaluated, showing a positive NPV. The company promotional mixes are also evaluated in terms of their expenses recommending the use of the newspaper advertising, the flyers, the bus shelter lead and trail panel advertising, printer, and digital billboard advertising are recommended for using in the opening of the wellness center. The hotel CVP analysis for the promotional boost of the hotel revenue is also conducted, showing how much occupancy rate is needed to achieve a certain target.
Introduction:
The case study is about the company of Crystal Hotel, who is planning to refurbish and renovate its hotel. The case study involves four tasks under two alternative departments. The company of Crystal Hotel is considering some vital decisions for its future growth. For this reason, they have hired an intern to aid them in their decision-making process. The use of the accounting information, if used correctly, would help the management to make the right decisions. The intern has the choice to join any of the two alternative departments of the company and then aid the management in finding the best accounting information facilitating the management in their decision making. The hotel is working on developing strategies for attracting new customers. The company is considering the option of using the roof of the hotel for the wellness centre. The hotel marketing manager is considering starting a wellness centre as it would acquire new clients, getting the advantage of the proximity of their hotel location to Parramatta (Heisinger, 2009). He also believes that this will help them increase customer referrals for their hotel services as well. He is thinking that the clients of wellness care would promote the hotel as well to their employers for business-related and accommodated services. The following four tasks show the computations for the analysis of the alternatives to reach the best decision.
Task 1:
In this task, the intern is expected to provide recommendations for the renting or acquisition of the equipment. Under the Wellness Center Project, the management is planning to build a small gym. The gym will be on the rooftop of the hotel. The sales and marketing manager is appointed to analyze the alternatives and make the most profitable decisions in this regard (Boone & Kurtz, 2008). The specific equipment for the gym either needed to be bought or rented. The company is going to include 5 treadmills, 3 elliptical trainers, 5 exercise bikes, and 3 rowing machines. The total budget for the equipment is $55,000. The analysis of the two alternatives for renting and the buying of the equipment is shown in the table below. The costs and the residual value of 20% are discounted at 8%. The costs are computed by multiplying the cost per piece of equipment with the number of equipment needed. The costs are discounted at 8%. The servicing is computed at 3% of the total cost.
The company buying option for the equipment shows that the resultant total price would be $58,582. However, the total budget given for the company is $55,000. The company, therefore, cannot afford these options as it is expensive and out of budget.
| BUY OPTION | ||||
| Cost | Discounted Residual Value | Servicing | Total Cost over 3 years | |
| Treadmill (5 pieces) | $30,285 | $4,808 | $909 | $26,385 |
| Elliptical Trainer (3 pieces) | $12,117 | $1,924 | $364 | $10,557 |
| Exercise Bike (5 pieces) | $16,660 | $2,645 | $500 | $14,515 |
| Rowing Machine (3 piece) | $8,178 | $1,298 | $245 | $7,125 |
| Total Cost | $67,240 | $10,675 | $2,017 | $58,582 |
Compared to this, the renting option is analyzed, as well. This has resulted in a total cost of $51,320. The discounted value for each year is computed by using the total cost of the total number of the equipment for each of the equipment and then discounted at 8%. The resultant total costs over the years and of the equipment are shown in the table below. The company is thus recommended to choose the renting option as it is not only within the budget limit but also is cheaper as compared to the purchase option of the equipment.
| RENT OPTION | ||||
| Discounted Value Year 1 |
Discounted Value Year 2 |
Discounted Value Year 3 |
Total Cost over 3 years | |
| Treadmill (5 pieces) | $9,120 | $8,445 | $7,819 | $25,384 |
| Elliptical Trainer (3 pieces) | $2,806 | $2,598 | $2,405 | $7,809 |
| Exercise Bike (5 pieces) | $4,185 | $3,875 | $3,588 | $11,648 |
| Rowing Machine (3 piece) | $2,328 | $2,155 | $1,996 | $6,479 |
| Total Cost | $18,439 | $17,073 | $15,808 | $51,320 |
Task 2:
The other task which is needed to be analyzed is that of the memberships. The monthly memberships of the wellness centre are going to be of two types: Basic membership and full package membership. The basic membership is expected to include the pool, sauna, and gym as the cost at $40 per week (Lamb, Hair, & McDaniel, 2008). The other full package membership is expected to cost $81 per week and would include access to an in-house personal trainer for one hour per week, and a dietician per month in addition to the pool, sauna and gym. The initial investment for promotion of the wellness centre is expected to be $53,373 and the continuous promotion expenses at $1000 per month. The total revenue from external clients is expected to be at $151,000 in year 1 and is expected to increase by 10% every year. The dietician will cost $2000 per month, and the in-house trainer will cost $ 6000 per month, which is both expected to increase by 4% annually.
The Net Present Value for the 3 years external membership project is expected to cost 8% as the cost of capital and 30% of company tax. The evaluation of the project is conducted below.
| Membership (Basic $40/month, Full Package $81/month) | |||||||
| Membership Project | Cash Outflow | Cash Inflow | Net Cash Flow | Tax | After-Tax CF | PV Factor | NPV |
| Year 0 | $53,373 | $0 | -$53,373 | -$53,373 | $1.00 | -$53,373 | |
| Year 1 | $108,000 | $151,000 | $43,000 | $12,900 | $30,100 | $0.93 | $27,870 |
| Year 2 | $111,840 | $166,100 | $54,260 | $16,278 | $37,982 | $0.86 | $32,563 |
| Year 3 | $115,834 | $182,710 | $66,876 | $20,063 | $46,813 | $0.79 | $37,162 |
| NPV | $389,047 | $499,810 | $110,763 | $49,241 | $61,522 | $3.58 | $44,223 |
The computation of the net present value of the wellness care membership project shows a positive NPV of $44,232 (Weygandt, Kimmel, & Kieso, 2009). Thus, as the hotel is earning positive NPV then it should consider investing in it and initiating this project. The cash outflow includes the initial promotional investment, the monthly promotional investment, the cost of the monthly expense of the dietician, and the in-house trainer. The cash inflow includes the value of the total revenue value given by the marketing manager increased at 10% in the latter two years.
Task 3:
Another important task which is designated is that if the promotional activities. The company is expecting that once the wellness centre is opened, it will need promotions to retain its existing clients and also to get new clients as well. The opening event has been planned by the company for which the budget is $23,000, and the overall opening of the center is expected to remain within the budget of $35,000. The remaining $12,000 is expected to be used for additional promotional activities (Mowen, Hansen, & Heitger, 2008). This is designated for the opening centre only. The rates for the different kinds of promotional activities are given, which include the advertising in Parramatta Times, digital foyer advertising in the Parramatta metropolitan area, digital billboards, bus shelter posters, flyers, printed billboards, and retail advertising. The analysis and recommendation for the selection of the promotional activities suitable for the wellness care opening are given below:
| Promotional Budget | |||||
| Item | Price (excluding GST) | GST | Price (including GST) | Quantity Required | Total Budgeted Value |
| The Parramatta Times | $1,132 | $113 | $1,245.20 | 1.00 | $1,245 |
| Printed Billboard | $4,995 | $500 | $5,494.50 | 1.00 | $5,495 |
| Flyers A6 flyers 1-sided | $676 | $68 | $743.60 | 1.00 | $744 |
| Medium Digital Billboard | $2,610 | $261 | $2,871.00 | 1.00 | $2,871 |
| Bus Shelter Lead Panel | $715 | $72 | $786.50 | 1.00 | $787 |
| Bus Shelter Trail Panel | $615 | $62 | $676.50 | 1.00 | $677 |
| TOTAL | $10,743 | $1,074 | $11,817 | $6 | $11,817 |
After the analysis of the various promotional activities available and evaluation of different promotional mix, it is recommended that the company uses 1 quarter page stripe advertising in the Parramatta Times, 1 Printer billboard advertisement which will be advertised for 4 weeks, 1 bus shelter train panel advertisement, 1 medium digital billboard, and 1000 flyers of A-6 pages printed on one side, and 1 bus shelter lead panel advertising. This will include all costs under $12,000. Using the different promotional mix will allow the hotel to reach different market segments of Parramatta. The flyers will work best for mass marketing and expanding the reach of the promotion as would the bus shelter advertising as it would move around in the city. The printed and digital billboard at prime locations of the city and the advertising in the newspaper will give the company the promotional boost it needs to launch its wellness care centre.
Task 4:
The last task which needs to be conducted and evaluated is that of the CVP analysis of the promotional activities. The Crystal hotel needs to run the promotion also to boost the occupancy rates of the hotel. The company is aiming to charge around $130 per person for a night stay, which also includes a buffet breakfast facility (Cafferky, 2010). The variable cost per person if $40, and the fixed costs for the hotel are $35,000 annually. The hotel has a total number of 100 rooms, and it operates all through the year. The occupancy rates without any promotions have been around 70% throughout the seasons.
| CVP ANALYSIS | |
| CM | $90.00 |
| CMR | 69% |
| Break-even (units) | 388.89 |
| Break-even ($) | $50,556 |
| Number of services required to earn a target net profit of $150,000 | 2056 |
The analysis shows that the company is earning a contribution margin per service of $ 90. This is calculated by deducting the company variable costs from the revenue per room for one night from one guest. The company contribution margin ratio is 69%. The company break-even in units is 388.89, which shows that it needs only 389 services to reach to breakeven point. The company needs to make around $50,556 to reach the breakeven point. The company needs to conduct 2056 services to reach the annual net profit of $150,000. This implies that the company needs to have only 20% occupancy which is very low as compared to its current revenues. Thus, it can be easily achieved (Albrecht, Stice, Stice, & Swain, 2007).
Conclusion:
The analysis of the tasks under the sales and marketing department has shown how the company can evaluate its alternatives by using the accounting information to make the right and profitable decision. This is shown by evaluating the renting and the purchasing of gym equipment, showing that the equipment rented would be cheaper. Similarly, the net present value of the cash outflows and the inflows of the memberships in the wellness center are also evaluated showing a positive NPV. The company promotional mixes are also evaluated in terms of their expenses and the perfect mix is recommended, which is well under the budget of $12,000. Similarly, lastly, the hotel CVP analysis for the promotional boost of the hotel revenue is also conducted, showing how much occupancy rate is needed to achieve a certain target.
Recommendations:
It is thus recommended that the Crystal hotel should rent the equipment for the gym to remain well below its budget for the equipment. It is also suggested to start the membership plan for the external members of Parramatta as it would yield a positive NPV for the hotel. In terms of the promotional mix, the newspaper advertising, the flyers, the bus shelter lead and trail panel advertising, printer, and digital billboard advertising are recommended for use in the opening of the wellness center. These promotional activities will cost well under the promotional budget of $12,000. Furthermore, the company is also recommended to launch its wellness centre as it will result in a boost in the sales and occupancy rates of the hotel as well.
References:
Albrecht, W., Stice, J., Stice, E., & Swain, M. (2007). Accounting: Concepts and Applications. Cengage Learning.
Boone, L., & Kurtz, D. (2008). Contemporary Marketing 2009 Update. Cengage Learning.
Cafferky, M. (2010). Breakeven Analysis: The Definitive Guide to Cost-Volume-Profit Analysis. Business Expert Press.
Heisinger, K. (2009). Essentials of Managerial Accounting. Cengage Learning.
Lamb, C. W., Hair, J. F., & McDaniel, C. (2008). Essentials of Marketing. Cengage Learning.
Mowen, M., Hansen, D., & Heitger, D. (2008). Cornerstones of Managerial Accounting. Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Managerial Accounting: Tools for Business Decision Making. John Wiley & Sons.
