Accept business at a special price If you are not familiar with Priceline.com In
ID: 2487589 • Letter: A
Question
Accept business at a special price
If you are not familiar with Priceline.com Inc., go to the website. Assume that an individual "names a price" of $90 on Priceline.com for a room in Miami, Florida, on September 3. Assume September 3 is a Saturday with low expected room demand in Miami as a Marriott International, Inc., hotel, so there is excess room capacity. The fully allocatted cost per room per day is assumed from hotel records as follows:
Housekeeping labor cost* $30
Hotel depreciation $50
Cost of room supplies(soap, paper, etc.) $2
Laundry labor and material cost* $6
Cost of desk staff $8
Utility cost (mostly air conditioning) $4
Total cost per room per day $100
*Both houskeeping and laundry staff include many part-time workers, so that the workload is variable to demand.
Should Marriott accept the customer bid for a night in Miami on September 3 at the price of $90?
Explanation / Answer
The problem is about the concepts of variable cost and fixed cost. The Fixed cost can be also treated as sunk cost which may not be relevant for the decision making at present. Any excess amount of bid over variable cost will absorb some fixed cost which may kept idle as there is no demand( i.e.,opportunity fare from others ).
Variable cost of operating cost per room per day
Particulars
$
variable cost
Variable cost of operating cost per room per day
house keeping labour cost
30
cost of room supplies
2
laundry labour and material cost
6
Utility cost
4
Total variable cost(A)
42
fixed cost
hotel depreciation
50
cost of desk staff
8
Total fixed cost(B)
58
TOTAL
Total cost(A+B)
100
So, Marriott should accept the customer bid for a night in Miami on September 3 for price of $90 as it is more than the variable cost, and it also recovers Fixed cost to the extent of $48 (90-42), after meeting the variable cost. if the bid is not accepted there might be any recovery of overhead cost ( fixed cost), that is loss of $48.,
Note: the Desk staff salary will be mostly in the nature of administration, which is considered as fixed, if it is also considered variable then the variable costs become $50. It is not good to consider it as Variable cost as irrespective of room occupency desk staff had to be paid.
Particulars
$
variable cost
Variable cost of operating cost per room per day
house keeping labour cost
30
cost of room supplies
2
laundry labour and material cost
6
Utility cost
4
Total variable cost(A)
42
fixed cost
hotel depreciation
50
cost of desk staff
8
Total fixed cost(B)
58
TOTAL
Total cost(A+B)
100