Skyview Manor

This case study is set in 1962 in rural Vermont. The Skyview Manor is an old, but well­

maintained property that has changed ownership several times over the years. It has no

restaurant or bar. It is positioned as a mid-price, good quality "destination" resort hotel.

The Skyview Manor is open only during the skiing season. It opens on December 2 and closes the last

day of March. The ski mountain it serves operates on a permit from the state which allows only 120

days of operation per year. Each of the 50 rooms in the east wing rents for $ 1 5 for single occupancy or

$20 for double occupancy. The west wing of the hotel has 30 rooms, all of which have spectacular

views of the skiing slopes, the mountains, and the village. Rooms in this wing rent for $20 and $25 for

single or double occupancy, respectively. The average occupancy rate during the season is about 80%

(typically, the Hotel is full on weekends and averages 50 to 60 rooms occupied on week nights). The

ratio of single versus double occupancy is 2:.8, on average.

Operating results for the last fiscal year are shown in Exhibit I. Mr. Kacheck, the manager of

the hotel, is concerned about the off-season months, which show losses each month and reduce the high

profits reported during the season. He has suggested to the owners, who acquired this hotel only at the

end of the 1961 season, that to reduce the off-season losses, they should agree to keep the west wing of

the hotel operating year-round. He estimates the average occupancy rate for the off-season to be

between 20% and 40% for the next few years. Kacheck estimates that with careful attention to the off­

season clientele a 40% occupancy rate for the 30 rooms during the off-season would be much more

likely if the owners would commit $4,000 for advertising each year ($500 for each of8 months). There

is no evidence to indicate that the 2:8 ratio of singles vs. doubles would be different during the

remainder of the year or in the future. Rates, however, would have to be drastically reduced. Present

plans are to reduce them to $ 1 0 and $ 1 5 for singles and doubles.

The manager's salary is paid over 12 months. He acts as a caretaker of the facilities during the

off-season and also contracts most of the repair and maintenance work during that time. Using the west

wing would not interfere with this work, but would cause an estimated additional $2,000 per year for

repair and maintenance.

Mrs. Kacheck is paid $20 a day for supervising the maids and helping with check-in. During

the season, she works 7 days a week. The regular desk clerk and each maid are paid on a daily basis at

the rate of $24 and $ 1 5 respectively. The payroll taxes and other fringe benefits are about 20% of the

payroll. Although depreciation and property taxes would not be affected by the decision to keep the

west wing open, insurance would increase by $500 for the year. During the off-season, it is estimated

that Mr. and Mrs. Kacheck could handle the front desk without an additional person. Mrs. Kacheck

would, however, be paid for 5 days a week.

The cleaning supplies and half of the miscellaneous expenses (room supplies) are considered a

direct function of the number of rooms occupied. The other half of the miscellaneous expenses are

fixed and would not change with 12 month operation. Linen is rented from a supply house and the

cost also depends on the number of rooms occupied, but is twice as much, on average, for double

occupancy as for single occupancy. The utilities include two items: telephone and electricity.
226 Sk iewManor

There is no electricity expense with the motel EXHIBIT 1

closed. With the motel operating, electricity expense is a Skyview Manor

function of the number of rooms available to the public. Operating Statement, For the Fiscal Year ended 3/31/62

Rooms must either be heated or air-conditioned. The

telephone bills for each of the four seasonal months were Revenues $160,800

as follows: Expenses

Salaries

Manager $15,000

80 Telephones@ $3.00/month $240 Manager's Wife 2,400

Basic Service Charge 50 Desk Clerk 2,880

$290 Maids (four) 7.200

$27,480

Payroll Taxes and Fringe Benefits 5,496

During the off-season, only the basic service Depreciation (15 year life) 30,000

charge is paid. The monthly charge of $3 is applicable Property Taxes 4,000

only to active telephones. Insurance 3,000

An additional aspect of Mr. Kacheck's proposal Repairs and Maintenance 17,204

is that a covered and heated swimming pool be added to Cleaning Supplies 1,920

the hotel. Mr. Kacheck believes that this would increase Utilities 6,360

the probability that the off-season occupancy rate would Linen Service 13,920

be above 30%. Precise estimates are impossible. It is felt Interest on Mortgage(5% interest rate) 21,716

that although the winter occupancy rate will not be greatly Miscellaneous Expenses 7,314

affected by adding an indoor pool, eventually such a pool Total Expenses 138.410

will have to be built to stay even with the competition. Profit before Federal Income Taxes $22,390

The cost of such a pool is estimated to be $40,000. This Federal Income Taxes (48%) IO 747

amount could be depreciated over 5 years with no salvage Net Profit $11.643

value ($15,000 of the $40,000 is for a plastic bubble and

the heating units, which would be used nine months of the QUESTIONS

year). The only other costs associated with the swimming

I. On average, how many rooms must be rented each

during the busy hours; additional insurance and taxes, night in season for the hotel to breakeven?

estimated to be $ 1,2 00 ; heating cost of $1,000; and a 2. The hotel is full on weekends in the ski season. If all

yearly maintenance cost of $ 1 , 8 0 0 . If the pool is covered, room rates were raised $5 on weekend nights, but

a guard would be needed for 12 months. If it is not

covered, a guard would be needed only for 3 summer revised profit before taxes for the year, per Exhibit 1?

months (from 15 June to 15 September, the warmest 3. What is the proposed incremental contribution margin

period of the year), and there would be no heating

expense. 4. For each alternative in the case, list the annual

expenses that are incremental to that decision

alternative but are not related to the room/days

occupied.

5. For each decision alternative calculate the occupancy

rate necessary to break even on the incremental annual

expenses.

6. What alternative do you recommend? Why?

7. Evaluate the profitability of the Hotel as an investment

for its owners. Does this affect your answer to

question 6? 11