Reference no: EM132600445 , Length: word count:2000

BIZ201 Accounting for Decision Making - Laureate International Universities

Scenario Analysis - Group

Learning Outcome 1: Explain and evaluate the role and importance of financial information in business decision making

Learning Outcome 2: Apply relevant accounting concepts to simple business scenarios

Learning Outcome 3: Apply basic costing and budgeting techniques to business decision making

Learning Outcome 4: Apply capital budgeting techniques to capital investment scenarios

Business Report

The owners of the Crystal Hotel are planning to renovate and refurbish the hotel. A part of the redevelopment plan is to build a Wellness Centre on the rooftop of the hotel. The Sales and Marketing Manager volunteered to help with this project. He is a strong believer that it would bring the hotel up to the next level and that it would attract additional customers to the hotel.

Due to the location of the hotel being within proximity to the business district, he believes that the Wellness Centre should be opened to external clients as well. He suggests employing a full time, in-house trainer and a part-time dietician. He believes selling monthly membership including training sessions and dietary advice will attract additional clients who may then promote the hotel to their employers for accommodation and other business-related services.

The marketing manager wants to be well prepared to support the Wellness Centre project and needs help with few tasks from your team.

TASK 1
As part of the Wellness Centre Project, the plan is to build a small gym on the rooftop of the hotel. You have been appointed to help the Sales and Marketing manager to make decision whether to rent or buy specific equipment items. The required items are included in Appendix 1 together with costing information. The budget for the required equipment is $40,000 for the life of the equipment.
Regarding the buying of the equipment, the useful life is predicted to be 3 years after which replacement is needed. At the end of its useful life, it is expected to be sold for the residual value of 20% of its original cost. A servicing contract will be drawn up with a company to take care of the equipment. Servicing will cost the hotel additional $500 every year over the period of its useful life. This is to be paid separately as one lump sum at the beginning of the term and will last 3 years.
For the renting option, choose the one that is the most beneficial for the business. The rent is expected to rise by 10% each year. The rent is paid at the beginning of each period. Servicing of the equipment is included in the rent.
REQUIRED

The manager would like to know whether it would be better for the Hotel to buy the required equipment or to rent it. Explore both options and make a recommendation. Consider the time value of money at the discount rate of 5%. Include advantages and disadvantages of each option and justify your choice.

TASK 2
The Sales and Marketing Manager has an idea of creating monthly memberships for external visitors that he would like to explore further. He is thinking to create two types of membership options. A Basic Membership which would include access to the gym, sauna and pool and it would cost clients $40 a week. A Full Package Membership would additionally to the access include a one-hour weekly session with the in-house personal trainer and a dietician consultation once a month. Clients would pay $81 per week for this type of membership.
He believes that an initial investment into promoting the centre would be $40,000 and subsequent cost of continuous promotion would be $2000 per month. The in-house trainer is expected to cost the hotel $5500 per month and the services of dietician additional $1500 per month and both are expected to increase by 3% each year.
Based on his calculations he believes offering the membership to the external clients would generate total revenue of $150,000 in the first year increasing by 10% every year after that.

REQUIRED
Calculate the net present value of the external membership project over the next 3 years period. Use yearly basis for your calculations. The estimated cost of capital for the hotel is 5%. Assume 30% company tax in Australia when determining the values of the after-tax net cash flow for each year.
Based on your analysis, would you recommend accepting the project and offer the membership to the external clients? Explain the basis for your recommendation.

TASK 3
Once the Crystal Hotel Wellness Centre is ready for opening, it will need to be promoted to existing and potential new clients. There is already an opening event (luncheon) planned which is handled by the Functions and Events Department. The overall budget for promoting the opening of the centre is $35,000 (inclusive of GST). The opening luncheon is budgeted to cost $25,000.
Your team has been appointed to plan additional promotional activities for the remaining
$10,000 (inclusive of GST). The budget is aimed for the promotion of the opening of the centre only. Continuous promotional activities as well as online advertising will be handled separately.
The marketing team has done initial research and the promotional activities to be considered are listed in the Appendix 2. Negotiated pricing has been included as well.

REQUIRED
Choose suitable promotional activities from the list provided to you and create a promotional budget for the Crystal Hotel Wellness Centre opening. Justify your choice of activities.

TASK 4
The GM has suggested Crystal Hotel to run a promotion to boost the occupancy rates of the hotel. They aim to charge $170 for one night's accommodation including buffet breakfast. The variable cost per person is $50 that includes food, cleaning and utilities. Fixed costs are $60,000 per year that include council rates rate, water rates and land taxes. There are 100 rooms in the hotel and the hotel operates all year round. In general, without any promotions, the normal occupancy rates are 80% throughout the year.

REQUIRED
They have asked for your expertise to carry out a CVP analysis for this promotion. Calculate the following:

1. The contribution margin per service (a unit of service is one night's accommodation for one guest).

2. The contribution margin ratio.

3. The annual break-even point in number of services and in dollars of service revenue.

4. The number of services required to earn a target net profit of $150,000 for the year (ignore income taxes).
5. Analysis the importance of CVP analysis and comment on effectiveness of this promotion based on your calculations.
6. Some of the marketing team suggest that the room charge for the promotion should be raised to $200. Comment on whether this should be done and what effect it will have on reaching the target profit.

Attachment:- Accounting for Decision Making.rar