Problem - Winter Garden is a luxury hotel with 165 suites. Its regular suite rate is $200 per night per suite. The hotel's cost per night is $125 per suite and consists of the following.
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Variable direct labor and materials cost
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$28
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Fixed cost [($5,870,000/165 suites) ÷ 365 days]
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97
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Total cost per night per suite
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$125
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The hotel manager received an offer to hold the local Rotary Club annual meeting at the hotel in March, which is the hotel's low season with an occupancy rate of under 55%. The Rotary Club would reserve 45 suites for three nights if the hotel could offer a 55% discount, or a rate of $90 per night. The hotel manager is inclined to reject the offer because the cost per suite per night is $125. The manager believes that if 45 suites are offered at the rate of $90 per night for three nights, the hotel would lose $4,725, computed as ($90 - $125) × 45 suites × 3 nights.
Required:
(a) Prepare an analysis of this offer for the hotel manager.
(b) Should the offer from the Rotary Club be accepted or rejected?