Air Canada Contract

Air Canada Contract

Our hotel has been requested to provide accommodation to the crew members of Air Canada. This contract is not a guaranteed one, which means that it has been pitched to 10 other hotels and based on an auction style layout would be awarded to the hotel with the lowest prices. For the analysis of the contract, Air Canada has provided us with information regarding the services they require and the maximum price they are willing to pay. Taking all this into account, the contract will last for 3 years with a high probability of Air Canada being a long term client. Therefore, it is essential for us to determine the benefit this contract has on our Net Incomes. Based on the maximum price Air Canada is willing to pay, I have analyzed the impact of accepting this contract and have made a number of assumptions. The income statements on our records provide us with enough budgeted data to compare our profitability over the next three years. For expenses, actual numbers have been used relating to the price increase of $65/room. I feel that these numbers portray the economic reality of the situation and provide us with a more accurate picture of the costs we incur.

A number of assumptions have also been made:

The month of March contains 31 days.

The high season for the hotel is from April to August (4 months). The rest of the months are low season.

Expenses attributed to the different hotel divisions have been computed on a per room and per meal basis respectively.

The cost of equity was not provided and therefore was assumed to be 5% - the same as the cost of debt.

Rooms Division

Expense Allocation Key (Daily Basis)

Rooms occupied 140 rooms (200 x 70% occupancy rate)

Expenses

Budget (75% Occupancy)

Actual (58% Occupancy)

Other

$4,490/150*31=$1.181

$3,996/3600 =$1.11

Wages

$23,250/150rooms@31nights=$5/rooms

$18,500/3600= $5.18rooms

Supplies:

9000/150rooms@31 = $1.94/room

7390/3600=$2.053/room/night

Linen

$13,500/150rooms@31days=2.9032

$13,542/3600=3.762

Telephone

$7,290/150/31=1.57/room/night

$5,832/3600=1.62

Based on the analysis presented in the above exhibit, we can see small discrepancies in the expenses. We therefore, assume the rates calculated through the actual data to conduct analysis for the Air Canada Contract.

In my analysis for revenues at different occupancy rates and prices, I deduced that telephone revenue was based on a fixed and variable income stream. The fixed revenues was based on the number of calls being made on average per night, while the variable income stream was based on the long distance minutes used per room.

Revenues

Budgeted - 75% Occupancy

Actual - 58% Occupancy

Fixed

150*31*$1 = $4650

116*31*$1=$3596

Variable

$3450/0.1*4650= 7.42min/room

2884/.1*3600 = 8 min/room

Based on the above analysis and cost drivers, Income statement for the Room Division has been recalculated with the following occupation rates - 70% low season, 85% high season and 70% high season.

Monthly

Occupancy

70%@$50

85%@$105

70%@$105

ACC 30%@$42

Room Revenue

217,000

553,350

455,700

78120

Basic Calls

4,340

5,270

4340

1860

Long Distance

3,472

4216

3472

1488

Total Revenue

224,812

562,836

463512

81468

Expense

Maid Wages

22307.6

27687.8

22307.6

9560.40

Supplies

8910.02

10819.31

8910.02

3818.58

OC - Cash

-

-

-

12501

Desk Clerk

-

-

-

3080.162

Linen

16327.08

19825.74

16327.08

6997.32

Phone Rental

7030.80

8537.11

7030.80

3013.20

Manager Salary

10470

10470