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Skyview Manor

This case study is set in 1962 in rural Vermont. The Skyview Manor is an old, but well-maintained
property that has changed ownership several times over the years. It has no restaurant or bar. It
is positioned as a mid-price, good quality destination resort hotel.

The Skyview Manor is open only during the skiing season. It opens on December 2 and
closes the last day of March. The ski mountain that it serves operates on a permit from the state
which allows only 120 days of operation per year. Each of the 50 rooms in the east wing rents
for $15 for single occupancy or $20 for double occupancy. The west wing of the hotel has 30
rooms, all of which have spectacular views of the skiing slopes, the mountains, and the village.
Rooms in this wing rent for $20 and $25 for single or double occupancy, respectively. The
average occupancy rate during the season is about 80% (typically, the Hotel is full on weekends
and averages 50 to 60 rooms occupied on week nights). The ratio of single versus double
occupancy is 2:8; on average.

Operating results for the last fiscal year are shown in Exhibit 1. Mr. Kachack, the
manager of the hotel, is concerned about the off-season months, which show losses each month
and reduce the high profits reported during the season. He has suggested to the owners, who
acquired this hotel only at the end of the 1961 season that to reduce the off-season losses, they
should agree to keep the west wing of the hotel operating year-round. He estimates the average
occupancy rate for the off-season to be between 20% and 40% for the next few years. Kacheck
estimates that with careful attention to the off-season clientele a 40% occupancy rate for the 30
rooms during the off-season would be much more likely if the owners would commit $4,000 for
advertising each year ($500 for each of eight months). There is no evidence to indicate that the
2:8 ratio of singles versus doubles would be different during the remainder of the year or in the
future. Rates, however, would have to be drastically reduced. Present plans are to reduce them
to $10 and $15 for singles and doubles.

The managers salary is paid over 12 months. He acts as a caretaker of the facilities
during the off-season and also contracts most of the repair and maintenance work during that
time. Using the west wing would not interfere with this work, but would cause an estimated
additional $2,000 per year for repair and maintenance.

Mrs. Kacheck is paid $20 a day for supervising the maids and helping with check-in.
During the season, she works seven days a week. The regular desk clerk and each maid are paid
on a daily basis at the rate of $24 and $15 respectively. The payroll taxes and other fringe
benefits are about 20% of the payroll. Although depreciation and property taxes would not be
affected by the decision to keep the west wing open, insurance would increase by $500 for the
year. During the off-season, it is estimated that Mr. and Mrs. Kacheck could handle the front
desk without an additional person. Mrs. Kacheck would, however, be paid for five days a week.
The cleaning supplies and half of the required by law during the busy hours;
miscellaneous expenses (room supplies) are additional insurance and taxes, estimated to
considered a direct function of the number be $1,200; heating cost of $1,000; and a
of rooms occupied. The other half of the yearly maintenance cost of $1,800. If the
miscellaneous expenses are fixed and would pool is covered, a guard is needed for 12
not change with 12-month operation. Linen months. If it is not covered, a guard is
is rented from a supply house and the cost needed only for three summer months (from
also depends on the number or rooms June 15 to September 15, the warmest
occupied, but is twice as much, on average, period of the year), and there would be no
for double occupancy as for single heating expense.
occupancy. The utilities include two items:
telephone and electricity. There is no EXHIBIT 1
electricity expense with the motel closed. Skyview Manor
Operating Statement, For the Fiscal Year ended
With the motel operating, electricity expense 3/31/62
is a function of the number of rooms
available to the public. Rooms must either Revenues $160,800
be heated or air-conditioned. The telephone Expenses
bills for each of the four seasonal months Salaries
Manager $15,000
were as follows: Managers Wife 2,400
Desk Clerk 2,880
80 Telephones @ $3.00/month $240 Maids (four) 7,200
Basic Service Charge 50 $27,480
$290 Payroll Taxes and Fringe
Benefits 5,496
During the off-season, only the basic Depreciation (15 year life) 30,000
service charge is paid. The monthly charge Property Taxes 4,000
of $3 is applicable only to active telephones. Insurance 3,000
Repairs and Maintenance 17,204
Cleaning Supplies 1,920
An additional aspect of Mr. Utilities 6,360
Kachecks proposal is that a covered and Linen Service 13,920
heated swimming pool be added to the hotel. Interest on Mortgage
Mr. Kacheck believes that this would (5% interest rate) 21,716
Miscellaneous Expenses 7,314
increase the probability that the off-season
Total Expenses 138,410
occupancy rate would be above 30%. Profit before Federal Income Taxes $22,390
Precise estimates are impossible. It is felt Federal Income Taxes (48%) 10,747
that although the winter occupancy rate will Net Profit $11,643
not be greatly affected by adding an indoor
pool, eventually such a pool will have to be QUESTIONS
built to stay even with the competition. The
cost of such a pool is estimated to be 1. On average, how many rooms must be
$40,000. This amount could be depreciated rented each night in season for the hotel
over five years with no salvage value to breakeven?
($15,000 of the $40,000 is for a plastic 2. The hotel is full on weekends in the ski
bubble and the heating units, which would season. If all room rates were raised $5
be used nine months of the year). The only on weekend nights, but occupancy fell to
other costs associated with the swimming 72 rooms instead of 80, what is the
pool are $400 per month for a lifeguard,
revised profit before taxes for the year,
per Exhibit 1?
3. What is the proposed incremental
contribution margin per occupied
room/day during the off-season?
4. For each alternative in the case, list the
annual expenses that are incremental to
that decision alternative but are not
related to the room/days occupied.
5. For each decision alternative calculate
the occupancy rate necessary to break
even on the incremental annual
expenses?
6. What alternative do you recommend?
Why?