Skyview Manor is a resort hotel that operates during the summer season and closes for the rest of the seasons. As such, it operates for four months starting from December to March, and closes down for the rest of the year (Shank, 2001). It is constructed in close proximity to a skiing mountain, allowing visitors to view skiing slopes, mountains and villages. However, since it does not operate as a bar or restaurant, the hotel is meant to serve summer visitors only, making its business close down for the rest of the year.
Nevertheless, it still incurs some costs during the closed period, such as the costs of maintenance and repair (Shank, 2001). It is observed that the hotel makes good profits during summer. However, since it does not operate for eight months in a year, then, the hotel closes its financial year at a loss. This is because, although high profits are realized in summer, no income is generated during the other eight months. On the other hand, the hotel incurs expenses throughout the year. Therefore, when the income earned in the four months is distributed over the whole year, it is not sufficient to cover the yearly expenditure (Shank, 2001).
Consequently, there is a proposal to make the hotel operational throughout the year. This should be done by keeping some sections of this hotel fully operational. During the summer season, the hotel has a daily average occupation rate of 80%. It is predicted that if the hotel is kept operational throughout the year, it can have a daily average occupation rate of between 20 to 40% (Shank, 2001). The expenditure of the hotel during the closed season is low, since salaries and wages payable are minimized by having the manager act as the caretaker. Electricity and telephone bills are also maintained low, due to minimal utilization.
The key issue under this case is managerial decision making. The management and owners of the hotel need to evaluate whether introducing full time operation is financially beneficial. Therefore, there is the aspect of comparing increased costs to revenue generated (Shanteau, 2001). Where the revenue generated is higher than the additional costs incurred, it will be beneficial to introduce full year operation. However, if the costs incurred are higher than the revenue generated, it is not worth keeping the hotel running throughout the year (Shanteau, 2001). If the hotel is to be kept operational throughout the year, it is proposed that a covered swimming pool is constructed.
This will increase insurance and maintenance costs (Shank, 2001). Services of a guard will also be required to take care of the pool. Therefore, although it is predicted that keeping the hotel operational throughout the year will increase income obtainable, it will also raise costs (Shanteau, 2001). However, labor costs are not likely to change significantly, since the manager and the supervisor take care of the front office matters. This means that the services of the front desk clerk will not be required (Shank, 2001). There will also be an additional monthly advertisement cost. Thus, even though there are financial gains that would arise from this change, it is likely to increase operational costs significantly.
Considering all the expenditure that would be incurred if the hotel is kept operational throughout the year, the hotel is likely to incur more losses. This is because hotel visitors during the 8 months are predicted to average between 20-40% daily, for the operational section. However, the costs to be incurred after introducing this change will be high. Therefore, it is recommended that the proposed change is not implemented, since it is not financially beneficial.
References
Shank, J. (2001). Cases in cost management: A strategic emphasis (2nd ed.). USA: Dartmouth College.
Shanteau, J. (2001). Management decision making. Encyclopedia of Psychology and Behavioral Science, 3, 913-915.