Reference no: EM132769138

BACKGROUND INFO

• Two entrepreneurs, Yvonne and Richard, are in the process of opening a new startup that they have temporarily named, Tiny Hotels Corporation.

• Tiny houses are small houses that are affordable small homes that have been introduced around the world. They have low running costs and have a very low environmental footprint so they are particularly appealing to younger adults. They are about the size of mobile home and can be movable and easily relocated.

• During the recent pandemic, with restricted international travel, Yvonne and Richard were looking at domestic travel and noticed that in some areas there were few hotels and the ones that were available were outdated. They came up with the idea of putting tiny houses on existing properties in areas that are in high demand for short term rentals. They thought this could appeal to the local businesses or individuals that would like to rent out their back yard or empty properties.

• They have been looking where to buy tiny houses and they would like to personalise the house to eventually develop a chain of Tiny Hotels that all have the same branding and a consistent product - a 'McDonalds' approach. They have sourced a few options to buy the tiny houses. The cheapest is a generic tiny house for $20,000 that will require additional work to provide the technology to meet their goals. They estimate about $10,000 additional per house. They also found a supplier in NSW that will provide two different custom versions (Woolamai $71,900 and Yaroomba $89,900) on the website Aussie Tiny Houses. They have not contacted them but expect to be able to negotiate a 20% discount if they can guarantee volume purchases.

• When the Tiny Hotels are positioned on a property, the running costs will consist of a local cleaner responsible for the hotel but customers would not necessarily have to interact with anyone as the reservations and check in will be via an app. Each house would be rented as a short term rental only. While the houses would be very similar across the fleet, the location will affect the potential revenue.

• The business model for the startup is not certain. They are considering the following model: Each house would be shared with 50% belonging to the company and 50% belonging to an investment. The revenue for the house when rented out (as a short term rental accommodation) would be split between: 50% to the investors, 20% to the landowner and 30% to the company. The cost of cleaning would be deducted from the pre-distributed revenue.

Problem 1: The best estimate for the central costs that need to be incurred are $85,000 to develop the Tiny Hotels app, and administrative/legal costs of approximately $25,000 per year. If the advertising costs per year are $35,000 for up to 5 hotels and $60,000 for more than 5 hotels, what is the break even point in terms of the number of hotels that need to be sold and be operating each year?