Hotel Management and Accounting
BIZ201 Accounting for Decision Making
Crystal Hotel Case Study
Functions and Events Department
Crystal Hotel through the department of functions and events has an option of purchasing fresh plants or hire a company to deliver and maintain the fresh plants in the lobby area. From the computations, buying Zamioculca Zamiifolia plant will cost the company $800 and the plant life span is three years this is excluding the maintenance cost. Hiring the same plant for three years including the maintenance cost is $3,848. If the company purchases 10 stems of Raphis Excelsa plant it will incur a cost of $1,360 as compared to $6,961 should the company hire the same plant. Incase the company purchases 10 pieces of Howea Forsteriana it will cost it a cash outflow of $570 whereas to hire a company to supply and maintain 10 pieces of the same plant the company will incur a cost of $5,037 for a period of three years. Crystal hotel also needs 30 pieces of Chamaedorea Elegans plant in the lobby, if this number of plants are purchased the Hotel will incur a cost of $1,980 excluding maintenance fee. However, if the Hotel hires another company to supply and maintain the same pieces of this plant it would cost a total of $16,555 for the three years.
Through buying the plants the company will have to hire a gardener to maintain the plants. The gardener is supposed to be payed $265 per week which is equivalent to $12,642 per year. Using the time value of money as 9% discount rate then the gardener will receive $11,598 and $10,641 for the second and third years respectively. The gardener will therefore earn a total of $34,881 for the three years for maintaining the plants. The plants will cost the Hotel a total of $4,710 to buy them. Therefore, if the company buys and hires a gardener to maintain the plants it will incur a total cost of $39,591. On the other hand, if Crystal Hotel hires another company to supply and maintain the plants for a period of three years it will incur a cash outflow of $32,401 within that period using 9% as a time value for money discount.
From the calculation, if the Hotel buy the plants it will have an outflow of $39,591 whereas, if it hires another company to supply and maintain the plants it will incur an outflow of $32,401 within a period of three years. It is clear from the computations that by hiring another company to supply and maintain the plants the company will spend less as compared to buying the plants. Hiring the plants also will help the Hotel to enjoy the 9% discount rate as a result of time value for money scenario.
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Advantages of Buying the plants
Should the company buy the plants it will be more advantageous in a number of ways. Crystal Hotel will have the freedom of owning these fresh plants and even alter them anytime without having to consult the supplier. Incase they want to exchange the plants by moving them to various stations within the premises the Hotel will do that without consulting. The company has the audacity to exchange these plants for a different plant, sell the plants as a source of income stream or hire the plants to other companies for cash when need arises. By owning these plants, the company is able to determine who will maintain the plants and how the plants will be maintained.
Disadvantages of Buying the plants
Through buying the plants the company might be left with negative equity especially if the funds are not readily available for purchasing the plants. Dishing out cash to buy these plants could tie up more capital of the hotel which would be used to invest in other things and hence this might cause a lot of difficulty in recouping the capital quickly. The Hotel will be exposed to ongoing cost of maintenance and having to pay a gardener to take care of the plants. The company will also make itself committed to the security of the plants hence having to incur another cost.
Advantages of Hiring the plants
If it hires plants, Crystal hotel will not have to pay full cost of the plants or up front and thus reducing the burden of having to borrow or use up all the cash. The payments for hiring the supplier will be spread over a fixed period of time and hence the Hotel will benefit from the time value of money discount that will spread within the three years. This is to mean that, whatever the company will pay in the second and third year will not be of the same value as what it paid today despite the amount being the same. This will also help the Crystal hotel to match the payments of the plants to the income it generates. The hired company will also have to carry all the risks that may be related to the plants. Should the Hotel think of replacing the plants with different plant, it will only have to make small adjustments to the regular payments rather than having to order or buy new plants.
Disadvantages of Hiring the plants
The hotel has to make some payments in advance or pay deposit before the plants are delivered. The hotel will not have any decision on the plants because it does not own them. Crystal hotel will be locked into inflexible long-term agreements which may become difficult to terminate incase need arises. The hiring company will give complex and sophisticated rules to the hotel which at times can be hard to manage.
Conclusion and Recommendation
In ultimate analysis, the empirical evidence in the computations clearly indicates that hiring the plants will be less costly to the Hotel than buying the plants. From the computations crystal hotel will incur a cash outflow of $39,591 to buy and maintain the plants. If it has to hire a supplier to supply and maintain the plants the hotel will incur a total outflow of $32,401 distributed within three years. The hotel through paying the money in instalments will enjoy a time value of money discount of 9%. Hiring the plants will also help the Hotel retain some money and allocate to other investments. The hired company will be liable of all the risks pertaining to the plants hence reducing the burden of having to hire for safety of the plants.
Though, if the company buys the plants it will incur a total cost of $4,710, maintenance cost is very expensive because the company will have to hire a gardener at a cost of $34,881 for the three years. Crystal hotel is therefore recommended to hire a company to supply and maintain the plants because it will be less costly than having to buy the plants. It is also clear that hiring the plants has numerous advantages than buying and maintaining. This recommendation is also based on the computation in the excel file attached.
The hotel has an option of either paying for a one-off license fee or going for the subscription fee to acquire the services of a software package for streamlining event management to decrease time spent on booking events. From the computations the hotel will incur a total cash outflow $7,680 if it pays for a one-off license. If the hotel has to use the subscription option it will pay a total cash outflow of $ 7,259. It is therefore less costly for the company to use the subscription option than the one-off license option. Moreover, the price value of cash outflow for the subscription is slightly lower than that of one-off license with a total outflow of $6,226 and $ 7,569 respectively.
The subscription option has more advantages over the one-off license because it does not have an upfront payment and therefore can be accessible with crystal hotel even if it has a smaller capital budget to work with. Using the subscription option, the hotel can discontinue the service without having to lose any initial investment. Subscription option will allow crystal hotel to spread out cost for the three years by having to pay only $190 per month. Crystal Hotel will be able to add more users like sales department. This is so because subscription option has no upfront fee hence will stay with the provider for a certain amount of time.
On the other hand, one-off license option will only allow the hotel to pay $250 per year after an upfront fee of $6,900. This will be much cheaper than having to pay $2,348 per year. One-off license option will be more secure for the hotel because if a staff wants to access a certain piece of software they will have to be given license. The one-off license option come alongside installation packages and maintenance and thus the hotel will not have to incur costs on installations and maintenance of the software.
However, much as both the options have advantages they also have demerits. The subscription option has a sophisticated and complex process of discontinuing from the services and this might be a problem when the hotel will want to unsubscribe from the software. The option of subscription claims to give the hotel the power to disable the services but on the other hand, if payments are not remitted on time the company disables the services. One-off license option will not give the hotel the freedom to allow its professionals to use the package in various ways on their smartphones and tablets. The one-off option comes with the risk of self-hosting which will be a hindrance to the efficient running of the online streaming.
Accordingly, it is recommendable that the hotel integrates the subscription option because it is less costly as indicated in the computations and more so, it does not have an upfront payment hence saving the hotel a burden of having to borrow or spend all the cash. In comparison the one-off license incurs a total cash outflow $7,680 while the subscription option incurs a total cash outflow of $7,259 within the three years. Integrating the subscription option, the hotel will have the freedom to discontinue the services without fear of having to lose the upfront payment. The subscription option will offer a wide market for the hotel because the customers will be able to access the package on their phones and tablets and easily book for events.
Opening Luncheon Budget
To enable efficient promotion of the crystal wellness Centre opening luncheon, the hotel will need to outsource for various resources. These resources include; Chair cover hire, gift hampers, open entertainment, balloon centerpieces, guest gifts, food and beverages, casual staff and audio-visual system and staging. These resources fall within a budget of $20,500. After sourcing out various suppliers, it was found that; the 300 pieces of Chair cover hire- Black Lycra with Aqua & hot Pink Lycra Bands will be supplied at a cost of $ 1.10 per piece per hour. Therefore, the total cost of 300 pieces of chair cover for five hours will incur a total cost of $1,650. For the 10 pieces of gift hampers, each will cost $34.50 totaling to $345.
Open entertainment had very high charges with a minimum of $112.45 per hour. Therefore, for the three hours the open entertainment will incur a total cost of $377.35 for three hours. One piece of balloon centerpiece will be supplied at $0.95 and thus the 30 pieces will cost a total of $28.50. One guest gift will be supplied at $17.35 per piece, therefore, for the 300 pieces a total cost of $5,205 will be incurred. Food and beverages will be provided by the hotel at a cost $30.08 and $9 per person respectively. Therefore, the total cost for food and beverages will be $9,024 and $2,700 respectively. Hiring casual staff will incur a cost of $22 per hour, thus, 70 hours will incur a total cost of $1,540. From the calculation to realize efficient opening luncheon of Crystal Hotel wellness Centre a total budget of $20,830 will be incurred. A total of $1,894 out of the total budget will go to the GST.
Contribution margin of $60 is the amount that remains after all the variable cost of hiring the conference room are deducted. The contribution margin ratio of 60% is at least better percentage to cover for the expenses. A higher margin ratio is an indicator of the hotel to cover the expenses and fixed costs.
This analysis has helped crystal hotel to determine that it has $60 contribution margin in hiring the conference room. The hotel is now aware from the analysis that it only needs 150 units and $15,000 to cover for fixed and variable expenses of the conference room from the break-even point and break-even value respectively. Therefore, the hotel is now aware that only 150 units will be needed to cover these expenses. For crystal hotel to earn a net profit of $50,000 for the year it needs 983 services from the analysis. CVP analysis will give the hotel an insight into the profitability of accepting the meeting to take place in their conference room. This analysis will help crystal hotel to determine how changes in cost and volume will affect the income. The meeting is not effective because the company needs more than 150 units to make profit from the conference room or else it will break even and be forced to cover the expenses instead of making profit.
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Johnson, G. L., & Simik, S. S. (1971). Multiproduct CVP analysis under uncertainty. Journal of Accounting Research, 278-286.
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