The Goodnight Motel PDF

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A solution to the case study 'The Goodnight Motel,' by Ivey Publishing. This case is used in management accounting/ managerial accounting courses. This solution received a grade of 87%. ...

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Professional Accounting October 14th 2018 Management Accounting

Group Case Assignment: The Goodnight Motel Justin McGregor is the manager of The Goodnight Motel, a family run motel in the central tourist are of Grand Bend Ontario. This area attracts many tourists who wish to enjoy the beach, sun, and party atmosphere. The Goodnight Motel and other businesses in this area are highly exposed to seasonal business patterns- in the off season, from October 16 th- May 14th, the motel is rarely more than a quarter full, and recently the occupancy rates have dropped 715%. The hotel contains 30 units that rent at a regular price of 95 dollars per night in the high season, and a balance of the year rate of 80 dollars per night in the off season. Being off-season, many of the hotels in the area were offering rates lower than usual, McGregor was approached by a man named George Alward who wished to have his church group stay at the motel for two nights, at half the regular rate (half the rate is $40/night). McGregor has to weight the options, and make a decision as to whether he should accept or decline this offer. Stakeholders: the stakeholders are those who have an interest or concern in the business, in this case it would include Justin McGregor (manager) and his wife Marie, other employees of the motel such as Jack Snelgrove, Sheila O’Toole, and Mary Driscoll, as well as potentially the owner of The Goodnight Motel (not mentioned in this case). To make his decision, McGregor must weight one option against the other, and determine the opportunity cost of operating at the regular rate with an unknown occupant capacity for that weekend, or operating at a full occupant capacity for half the rate. In his decision, he must include both quantitative and qualitative factors. We discuss the quantitative data for the potential options below: Option 1: Operate at a regular rate of $80/night, for an occupancy of 6 units. (For comparison sake, we assumed that the occupancy rate for the two dates is 6 units which has been calculated this by assessing the givens- during this time the motel ‘rarely’ reaches 25% occupancy and in recent years has dropped 7-15 percent. We used the average of this decline (15%+7% / 2= 11%) to determine that 6 units (6.23 rounded) are occupied during this time.) Option 2: Rent rooms at half the regular rate, $40 ($80/2=$40), for an occupancy of 30 units. McGregor must determine total relevant costs for each option to compare revenue between the two. The relevant costs include wages for Sheila O’Toole and Mary Driscoll, utilities expenses, and cleaning and laundry supply expenses. (The wages for Jack Snelgrove are irrelevant because they are fixed, and the wages for the summer students are irrelevant because they do not work during these months. All other fixed costs are also irrelevant.)

Relevant Costs Option 1 Wages- Sheila O’Toole Wages- Sheila O’Toole (Saturday time and a half) Wages- Mary Driscoll (Saturday time and a half) Wages- Mary Driscoll Heating & Air Conditioning Cleaning Supplies/ Laundry Supplies Total Relevant Costs Option 2:

Equation 5 hours @ $16.00/hr 5 hours @ $24.00/hr (1.5x regular pay) 6 hours @ $24.00/hr (1.5x regular pay) 5 hours @ $16.00/ hr $5.00 @ 30 units @ 2 days $2.74 @ 30 units @ 2 days

Option 1: Rent rooms at 40 dollars per night, for an estimated occupancy of 30 rooms. (for two days) Net Profit Option 1:

($40.00)@(30 units)@(2 days)

Relevant Costs Option 2

Equation

Total

Wages- Sheila O’Toole Wages- Mary Driscoll Heating & Air Conditioning Cleaning Supplies/ Laundry Supplies Total Relevant Costs Option 2:

5 hours @ $16.00/hr 5 hours @ $16.00/hr $5.00 @ 6 units @ 2 days $2.74 @ 6 units @ 2 days

$80.00 $80.00 $60.00 $32.80

Option 2: Rent rooms at 80 dollars per night, for an estimates occupancy of 6 rooms. (for two days)

($80.00)@(6 units)@ (2 days)

Net Profit Option 2:

Total $80.00 $120.00 $120.00 $80.00 $300.00 $164.40 864.40

$2400.00 - $864.40 $1535.60 $1535.60

253.8

$960.00 - $253.80 $706.20 $706.20

Based on the factors of the ‘special order- make vs. buy’ decision process, we must assess any relevant qualitative factors as well. If McGregor accepts Alward’s proposal for a halfrate rental, he is allowing a group of (assumingly) good citizens from the church group to stay at his motel. The benefits from creating a good reputation are of importance in any business,

although you can’t put a price on goodwill it is a very valuable asset. When customers are happy, they hopefully increase potential business by encouraging others to visit and thus he is creating new potential customers. The question may be asked- if McGregor provides a discount to this group of customers, is there any potential for future customers to also expect a lower price? The answer is yes, people may discuss the price they paid and lead others to believe they should have the same discount. However, based on the qualitative data above, the Goodnight Motel could benefit from providing lower prices to attract a higher number of customers (especially during the off-season). This order can help retain the business of an existing profitable customer (if they return the next year) and will also help improve recognition and social brand responsibility.

In Conclusion, we would advise McGregor to accept Alwards offer of renting all rooms to the church group at half the regular price. Based on the qualitative data, McGregor is receiving a larger net profit when providing a discount for a higher capacity even after all variable costs are included. The opportunity cost he will receive is $848.80. If anything, the Goodnight Motel can benefit from the positive impact this decision will have on its reputation and social standing....