Radisson Blu Plaza Hotel Analysis: Breakeven Point And Target Profit

Cost driver and cost behaviour

This report briefly discusses about the cost drivers & cost behaviours and how the same can be identified for calculation of production cost of any product. There are two types of cost in production of any product which is fixed cost & variable cost. Both have been briefly explained along with determination of breakeven analysis of the company as per the requirements.

There are many of the costs that are faced by the company and these are further broken down into 2 main categories, the first being fixed costs and these second being variable costs.

The fixed costs are the costs that do not vary with the level of output achieved. These are also termed as the sunk costs since these are the costs in respect of which obligation has already been decided. The examples include rent, buildings etc.

The following is the chart which shows in the fixed costs:

Then the second are the variable costs. These are the costs that vary with the level of the output achieved. These are other than the sunk costs. The examples include labour, capital etc.

Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labour and capital. Variable costs may include wages, utilities, materials used in production, etc (Fundamental finance, 2018).

The following is the variable expense chart:

The following is the desired identification:

1. The internet charges are paid weekly and it doesn’t change irrespective of the usage: these are the charges that will have to be paid no matter if the same are used or not. Since, the obligation of the same has already been decided, hence, this would be termed as the Fixed Cost.?
2. The restaurant can cater for more than 3000 customers at a time irrespective of the ? The complimentary breakfast will cost them the same irrespective of the ?customer numbers: the customers could be 30, 3 or 3000, the cost incurred by the restaurant would be the same. Since, the obligation of the same has already been decided, hence, this would be termed as the Fixed Cost.?
3. The electricity charges, water charges and laundry expenses are un-predictable thus the ?management has only gone with an estimate in this cost. Thus, it can vary according to ?the usage: the electricity, water and the laundry expenses are unpredictable and always vary with the number of guests that are catered. Hence, this would be termed as the Variable cost. The cost driver would be the electricity, water units consumedand for laundry expenses, it would be the number of clothes washed.
4. The insurance is charged monthly and its constant: since this charge is constant, hence, the obligation to pay these must have already been decided, so the cost would be termed as the Fixed Cost.
5. Marketing charges are not constant as they vary season to season: since this charge would vary, the expense depends on one season to another. Hence, this would be termed as the Variable Cost. The cost driver would be the season.
6. Super-annulation charges for both the employees are charged at 9.5% on their total pay: since this charge is constant, hence, the obligation to pay these must have already been decided, so the cost would be termed as the Fixed Cost. This expense pertains to the employees of the company and since these employees are permanent, they will have to be paid even if they generate no revenue for the hotel.
7. Telephone expenses is charged weekly basis: if these expenses would vary with the number of the calls made, then these expenses would be Variable costs. The cost driver would be the number of calls made.
8. Waste removal charges are paid weekly: these charges are fixed in nature and hence, these charges would be fixed, no matter the amount of waste excreted by the hotel.

Break even analysis is not much of a business goal. It is the amount of the revenue when it is able to cover its expenses. The formula of this is Fixed expenses/Contribution per unit.

There are some of the costs that increase with the level of sales such as the materials production labour etc. these are termed as the variable costs. Then there are some of the expenses that do not rise with the level for sales achieved (Small business chron, 2018).

This analysis is helpful in the following:

• Price setting implications:once a person knows the about the points of break even, he is able to get into the long term pricing strategies for the company. Once he has already paid in the initial investment, then he could earn even more by keeping his process the same. Once the initial investment has been recovered, then even of the owner keeps the prices the same, then he would be able to earn more amount of profits for each unit. An increased amount of profit could also be achieved once the prices have been lowered and when one is not able to pay off the initial investment of debt that has been taken. The lowering down of the prices could help in resulting more amounts of sales which would I turn mean more profits even when the profit per unit is less.
• Marketing considerations:the break-even point must be calculated every time one person offers a sale of a discount. In case, the money is being spent for the purposes of promoting any product, then the addition being made to the promotion of the current exposure to the overheads for the given period of time would help in the determination of the new break-even point. This could also help in dividing in the promotion by the number of the additional number of the units of the profiting that would be extracted from the sales and then the same could be applied to the cost per unit.
• Financial strategies:there is yet another way of reaching this break even pint. One could increase the amounts of the sales, raise the prices for the purposes of increasing the margins of the profits, reduce in the profits that could help in the generation of more amounts of profits and lessen the amounts of the expenses. One could also lessen down the expenses through the way of cost cutting measured, depreciating the assets that are sued for the purposes of generating in the sales and reduce in the interest bearing debt or also, invest in the cash that has been generated in excess of the capital gains that has been earned on that money. Understanding and knowing the break-even points will lead the business to a very big place (Patil, 2018).
• Investment implications: the investors that would like to invest in the company would never want to know the potential return on their respective investment and they would allow not to know the return that they would be able to earn on the same. There are some companies that take several years before they make profits and then there are companies that might lose on profits in the early few years and then pick themselves up and start to generate in profits from their business operations. When any companies is profitable which is based upon the operations, then it would not require in cash for the purposes of investing in the company. But even then, the profitability from these business operations, the company could still carry on their initial investment when it needs to pay back the profits earned from their business operations (Damschroder, 2009). Hence, the company will not have made nay profit whatsoever for its investors. These people would want to know the break-even points for the purposes of planning in their investment that they have made into the company (Financial accountancy, 2018).

The following is the desired break-even analysis:

	(Amounts in $)
Particulars	VC	FC	Total
Full time wages		18,000.00
Casual employees wages	12,000.00
Internet charges		600.00
Free breakfast charges		2,000.00
Electricity	5,600.00
Water expenses	2,800.00
Public liability insurance		720.00
Marketing charges	1,200.00
Laundry expenses	350.00
Superannuation charges for full time employees		1,710.00
Superannuation charges for casual employees	1,140.00
Telephone expenses		120.00
Waste removal expenses		960.00
Total estimated expenses	23,090.00	24,110.00	47,200.00

Particulars	(Amounts in $)
Revenue per night per room	302.00
Number of rooms	300.00
Number of days	7.00
Total revenue	6,34,200.00

Particulars	(Amounts in $)
Total revenue	6,34,200.00
Less: variable costs	23,090.00
Contribution	6,11,110.00
Contribution per room	291.00
Break even point in room	Fixed costs/Contribution per room
	82.85
	Or 83 rooms

Hence, from the above, one could conclude that the break-even room for the hotel is 108 rooms.

The following are some of the ways through which break even points could be reduced resulting to more profit:

1. The full time wages of the employee could be reduced by offering them alternate jobs to the employees. This is in the sense that one employee could be made to work jobs or overtime could be given to them which would help the hotel in the reduction of the costs.
2. The breakfast charges could be reduced by giving them limited number of options of food. This is in the sense that the food items that are usually not opted for by the guests could be eliminated altogether, thereby reducing in the entire cost of it (Kocher, 1999).
3. The full time wages of the employee could be reduced by offering them alternate jobs to the employees. This is in the sense that one employee could be made to work jobs or overtime could be given to them which would help the hotel in the reduction of the costs. This would also lead to reduction of other fixed costs such as the superannuation costs related with the employees (Grol, 2001).
4. The telephone charges instead of being fixed cost be made variable which would depend upon the number of calls being made by the guest.

The above would lead us in the calculation of the margin of safety which would help us in comparing in the amounts of the revenue that have been eared or the units that would be required in for the purposes of covering in the fixed along with the variable costs. It could be stated that the company would have to rent out about 83 rooms in order to achieve a no profit or no loss situation.

The concept of target profit implementation means that any company would desire in the profits so that he is able to continue his business in the near future.

The following is the calculation of the profit for the hotel:

Particulars	Option 1	Option 2
Contribution margin per room	291.00	291.00
Total amount of fixed costs	24,110.00	24,110.00
Estimated profit	50,000.00	30,000.00
Estimated room booking	254.67	185.95
	Or 255	Or 186

Conclusion: 

From the above, it could be said that the company would benefit off if it goes for option B since the proposals states that option A would require in more number of rooms and the option B would require in lesser number of rooms (Accounting for management, 2018). If the hotel for more number of rooms, then the hotel will have no opportunity to generate in more revenues whereas if it goes for option B, (Francke, 2008) it would lead to lesser number of rooms being occupied which would in turn lead to more generation of revenue for the hotel (Small business chron, 2018).

References:

Assumptions, Limitations and Significance of Break Even Analysis. (2018). Retrieved from https://www.financialaccountancy.org/marginal-costing/assumptions-and-limitations-of-break-even-analysis/

The Importance of Breaking Even in Business Finance. (2018). Retrieved from https://smallbusiness.chron.com/importance-breaking-even-business-finance-63132.html

Variable Cost & Fixed Cost – Economics. (2018). Retrieved from https://economics.fundamentalfinance.com/micro_costs.php

Damshroder, L. (2009). Fostering implementation of health services research findings into practice: a consolidated framework for advancing implementation science.

Damshroder, L. (2009). Fostering implementation of health services research findings into practice: a consolidated framework for advancing implementation science.

Differential Power Analysis. (1999). Retrieved from https://link.springer.com/chapter/10.1007/3-540-48405-1_25

Factors influencing the implementation of clinical guidelines for health care professionals: A systematic meta-review. (2008).

JOURNAL ARTICLE Successes and Failures in the Implementation of Evidence-Based Guidelines for Clinical Practice. (2001). Retrieved from https://www.jstor.org/stable/3767643

Margin of safety – explanation, formula and examples | Accounting for Management. (2018). Retrieved from https://www.accountingformanagement.org/margin-of-safety/

Margin of Safety vs. Profit. (2018). Retrieved from https://smallbusiness.chron.com/margin-safety-vs-profit-56126.html

Moving target classification and tracking from real-time video – IEEE Conference Publication. (2018). Retrieved from https://ieeexplore.ieee.org/abstract/document/732851/