Question 4: Suppose Ritz-Carlton has a 400-room hotel in a tropical climate. Management expects occupancy rates to be 90 percent in December, January and February, 85 percent in November, March, and April, and 65 percent the rest of the year. The average room rental is $300 per night. Most of the costs of running the hotel are fixed. The variable costs are only $50 per occupied room per night. Fixed salaries (including benefits) run $650,000 per month, depreciation is $475,000 per month, other fixed operating costs are $225,000 per month, and interest expense is $500,000 per month. The tax rate is 40 percent.
Required:
a) Determine the net income for the month of December and for the month of June.
b) If an advertising campaign, costing $350,000, could increase the occupancy rates by five percentage points each month in the off-season (that is, from 65 to 70 percent in May through October), should Ritz-Carlton undertake the campaign? Assume that all off-season months have the same operating income as June.