Question: Hotel Pricing and Use of Capacity A growing corporation in a large city has offered a 200-room Holiday Inn a 1-year contract to rent 40 rooms at reduced rates of $50 per room instead of the regular rate of $86 per room. The corporation will sign the contract for 365-day occupancy because its visiting manufacturing and marketing personnel are virtually certain to use all the space each night. Each room occupied has a variable cost of $12 per night (for cleaning, laundry, lost linens, and extra electricity). The hotel manager expects an 85% occupancy rate for the year so she is reluctant to sign the contract. If the contract is signed, the occupancy rate on the remaining 160 rooms will be 95%.
1. Compute the total contribution margin for the year with and without the contract. Is the contract profitable to Holiday Inn?
2. Compute the lowest room rate that the hotel should accept on the contract so that the total contribution margin would be the same with or without the contract.