Financial Analysis - Lodge - Assignment Example

Running Head: FINANCIAL ANALYSIS Financial Analysis Name Institution Date FINANCIAL ANALYSYSIS The analysis of the financial situation is based on the Sovereign Lodge Case Study. This is the description of the case study. The following information is available. Sovereign Lodge has been known to be, however the maintenance is up to date with the property which has been under different ownership for several occasions in the past years. It has no restaurant or bar. It is positioned as a mid-price, good quality "destination" resort lodge. The Lodge has been operational at the time that the skiing season has been active. The operations run from all through to the month of March. It serves the ski mountain which is operational based on permits that facilitates the operations for a number of 120 days in the course of the year. All the existing 50 rooms that are positioned at east wing have an accumulated rent that amount to $15 in consideration of single occupancy accompanied by $20 for double occupancy. The wing on the west of this lodge is composed of30 rooms, all being made up of have impressive sites of the slopes that are skiing, in addition to the mountains, as well as the village. Rooms that are evident in the wing fetch a rent of$20 to $25 in consideration of single as well as double room occupancy, in a respective manner. The average rate of the room occupancy over the season is close to 80% The relative amount of the single in comparison to double room occupancy ranges at 2:8. The results of operation in consideration of the fiscal year that elapsed are indicated in the Exhibit 1. Mr. Kacheck who is acting as the manager in as far as the lodge is has expressed concern of the months in the off-season, which demonstrate losses for every month as well as the reduction of the high levels of profits that has been documented in the entire the season. He is for the opinion that the owners, who got the possession of the lodge during the later part of 2006 season, that they should take the steps of checking the losses during the off-season they have to come to a compromise of keeping the wing on the west the lodge in operation for the entire year. His estimates of thethe average rate ofoccupancy in the course of the off-season range at 20% to 40% for the coming few number of years. According to the estimates of Kacheck in consideration of careful consideration of the clientele off-season a 40% rate of occupancy considering 30 rooms in the course of the off-season is a possibility in case owners may opt to commit $4,000 to facilitate for advertising every year ($500 for the 8 months). There is no evidence to indicate that the 2:8 ratio of single vs. doubles would be different during the remainder of the year or in the future. The salary of the manager is compensated for the 12 months. His duties include the caretaker toi facilities at the time of the off season plus also contracting the majority of repair as well as the work of maintenance at that particular time. With the use of the wing to the west there is no work interference that would result to estimated extra $2,000every year to serve the purpose of repairing as well as maintaining the lodge Mrs. Kacheck has a compensation $20 for every day because of the supervory duties of the maids in addition to assisting in check-in. at the time of the season, she performs duty for the7 days in every week. The usual desk clerk plus every of the maid are compensated every day for $24 and also $15 respectively. The taxes of the payroll in addition to the rest of the benefits are totals to 20% of entire payroll. Even though depreciation in addition to taxes to property may have an insignificant effect as a result of the decision to to maintain the operation of the wing on the west, insurance may escalate by a magnitude of $500 each year. At the time of off-season, it is predictable for Mr. and Mrs. Kacheck to hold front desk without extra person. Mrs. Kacheck may, however, have an extra compensation 5 days every week. The supplies of cleaning plus half of sundry expenses are well thought-out as a undeviating function of the rooms that are under occupation. The remaining half in miscellaneous cost is fixed along with being static to alteration by way of 12 month of operation. Linen is on loan from the deliver house and the charge is based on the how many rooms are under occupation but is double as much for double room habitation as is the case of single room tenancy. The utilities comprise of two items: telephone in addition to electricity. There lack expense of electricity at the time of the closure of the lodge. With the operation of the lodge, electricity cost is dependent on how many rooms are accessible to public. Rooms should be be heated or else air-conditioned. The telephone bills for each of the four seasonal months were as follows: 80 Telephones @ $3.00/month $240 Telephone Basic Service Charge 50 $290 At the time of off-season, the only charge is on the basic service. The charge per month is $3 that applies to the active telephones. An additional facet in the proposal of Mr. Kacheck's holds about covered plus the heated swimming pool that are in addition to lodge. The believe of M r.Kacheck is that there would be an increase of the likelihood of the occupancy in the off-season rate above 30%. Precise estimates are unfeasible. It is a common believe that despite the fact of the occupancy rate during the winter may have insignificant effect as a result of additional indoor pool, sooner or later a pool of this manner may be erected to cope with competition. The fee of a pool of such manner is predictable at $40,000. The other costs linked to swimming pool amounts to $400 every month in lifeguard, necessary as guided by law in busy hours, extra insurance plus taxes, predictable to $1,200; heating charge amounting to $1,000; plus a annual cost of maintenance estimated at $1,800 EXHIBIT 1 Sovereign Lodge Operating Statement, up to 3/31/09 Total revenues collected is $160,800 Expenses Salaries for employees is as follows Manager $15,000 Manager's Wife 2,400 Desk Clerk 2,880 Maids (four) 7,200 $27,480 Payroll Taxes along with Fringe Benefits 5,496 Depreciation (15 year life) 30,000 Payment of taxes 4,000 Insurance costs 3,000 Repairs and Maintenance costs 17,204 Cleaning Supplies 1,920 Utilities 6,360 Linen Service 13.920 Interest on Mortgage (5% interest rate) 21,716 Miscellaneous Expenses 7,314 Total Expenses 138,410 Profit before Federal Income Taxes $22,390 Federal Income Taxes (48%) 10,747 Net Profit $11,643 1. The relevant decision alternatives in Mr. Kacheck's proposal include the following: i. Full operation of the west wing of the lodge: The proposal is such that the west wing which has 30 rooms both single and doubles be allowed to operate in both seasons including the off season as well. ii. Advertising: The information concerning the lodge be put in all forms of media including the internet. Print and television to project a 40% rate of occupation of the rooms. iii. Addition of a covered/uncovered and heated swimming pool: The provision of the swimming pool is seen majorly in two dimensions including that which in uncovered which does not require any additional heating and the other which is covered whereby additional heating is necessary. iv. Plastic Bubble and the heating units: This would facilitate and maintain the ambient temperature in the pool so that swimming activities are not interfered with. v. Provision of a lifeguard: This is seen as a safety measure to the swimmers which is essential to those learning how to swim. vi. Heating cost: The extra amount of expenses needed in the installation of the heating gadget as well as its cost of maintenance. vii. Insurance and taxes: Any additional expenses imposed on the company by the relevant authorities as a means of raising revenues by the state. viii. Annual maintenance cost: summation of all the expenses incurred on a yearly basis for the repair and servicing of the lodge as well as its facilities. 2. For every one alternative based on question some annual expenses are apparent which increases to decision option but lack a relation to room or the days that they have been in use, i.e. the higher fixed costs in the alternative. These are as follows: Decision alternative Annual Expense incurred 1. Addition of a enclosed along with heated swimming pool $40,000 2. Plastic Bubble and the heating unit $15,000 3. Provision of lifeguard uncovered swimming pool $400*3=$1,200 + no heating expense 4.Provision of a lifeguard(Covered pool) $400*12= $4,800+ heating expense 5. Insurance and taxes $1,200*3= $3,600 6.Annual maintenance cost $1,800 7.Heating cost $ 1,000 8. Advertising $4000 4. The computation for the incremental contribution (in $) per occupied room/day during the off-season are as follows Since this applies only for the west wing, which consist of 30 rooms, the breakdown for the extra costs per each room is as follows: Advertisements =$4000/30(assuming both rooms have same advertisement rate) =$133 each for both singles and doubles. Insurance increment =$ (3000+500) =$3500/30 for each room =$116.7 for each room both singles and doubles Mrs. Kacheck’s salary: 20 dollars* 5 working days = $100/30(for individual rooms) =$3.3 These totals up to: =$(3.3+133+116.7) =$253 5. For every choice alternative there may be rate of occupancy indispensable towards the breaking even of incremental expenses on annual basis that are planned as follows: The total expenses incurred in $ = $71,400 If 100% give the total expense rate of 138,41 What percentage represents 71,400? = 50% as the overall occupancy rate for both rooms. 6. The available alternative that may be recommended on the basis of the breakeven calculations may be expressed as follows The 50% occupancy rate implies similar profit margin during the off season hence the costs should be minimized as much as possible by avoiding unnecessary heating of the swimming pool as well as leaving the swimming pool uncovered. For example the cost of installation of the covered and the uncovered pools should be properly evaluated through the cost benefit analysis model so that the best alternative can be eventually chosen without the benefit of doubts. 7. Assessment of the productivity of Lodge being investment for the owners. The lodge is seen to generate less profit without the implementation of Mr. Kachecks ideas however with the implementation more profits will be realized. As there is a great margin in the profits realized during the off season in Mr. Kacheck’s ideas and that of the previous ideas hence it affects the answer above in 5 marginally. 8. Recommendations for the owners taking all issues into account. The owners should encourage ideas that necessitates cost minimization so the the magnitude of the expenditures and their total costs doers not override that of the revenues. Mr. Kacheck’s ideas are quite okay except that there is a lot of lacking information about its significance and justifications. Read More