Managerial Economics

Case study submitted by:

Mr. Amar Mandore – Roll No. 31327
Mr. Sudhir Shetty – Roll No. 31340
Mr. Rahul Vaidya – Roll No. 31343
Executive MBA (2008/11) – Semester I

Case 2 – Lakeside Hotel

Hotel Lakeside is a luxury hotel located on the southern tip of Lake George on the
outskirts of Albany, the capital of New York State. The hotel mainly caters to the
summer vacationers from the state capital. Based on the information provided, it
could be inferred that:
 The hotel is located in a cool place and the cool climate is a major attraction
for the visitors
 It predominantly caters to summer vacationers of higher middle income
families
 The hotel has witnessed a steady trend of visitors for the last ten years and
the average occupancy in three months June, July & August is 100%, the
average occupancy in May & September is 70% and the average occupancy
in April & October is 50%
 The management has a policy to shut down the hotel completely when the
occupancy rate falls below 50%. The hotel is closed for the remaining 5
months in the anticipation that the occupancy rate would fall below 50%
 The Average Rack Rent (ARR)for single room ranges from $15 to $20 per day
and the same for double rooms ranges from $25 to $30 per day
 The hotel is not air conditioned and thus not well equipped the handle the off
season (winters) given its location in a cool place

Considering the above information, the decision to reduce the Average Rack Rent
could adversely affect the image of the hotel, as it caters to the higher middle
income families. However on the other side keeping the hotel closed for five months
and incurring losses on fixed costs is also not an ideal business decision.

Hence to generate a business stream in the off season (five months) and to
maintain the reputation and imageability of the hotel, a 50% discount in ARR for the
loyal customers could be offered. This would take care of not diluting the brand
image of the hotel and at the same time ensure some revenue to minimize the fixed
cost.
Workings

Gross Annual Revenue (as given) $ 1,454,000

Net Annual Inc ome (as given) $ 145,000
Annual operating Expenses (derived) $ 1,309,000

Fixed Annual operating Expenses (derived) $ 872,667

Fixed operating expenses per month (derived) $ 72,722
Variable Operating Expenses (derived) $ 436,333

Therefore the variable operating expenses ar 30% of the Gross Annual Revenue

Assuming the weighted Average Rack Rent (ARR) is $24 per room (in normal
scenario). Therefore after offering a 50% discount on ARR, the ARR during 5 months
of the off season would be $12 per room per night. Further assuming that due to the
offseason discount the average occupancy would be maintained at 50%.

Gross Revenue for 5 months $ 365,000

Variable Operating Expenses (@ 30% of the gross $ 109,500
revenue)
Net Operating Inc ome (for 5 months) $ 255,500
Proportion of fixed cost recovered due to operating 3.51
in the offseason (5 months)
Hence it is observed that the hotel owner can recover part of the burden of the
fixed cost - about 3.5 months worth fixed cost apart from the operating expenses
during the five off season months. This would help the operator in increasing profits
without diluting the brand image of the hotel.

The economic theory that is used to justify the decision of operating the hotel in off
season is Demand Analysis. The effective demand for hotel rooms is manipulated by
offering a flat 50% discount to loyal customers.