Question

Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years. Due to a hotel owner's illness, Amy was offered the opportunity to purchase a hotel near a seaside vacation area she had often visited. After obtaining a lawyer and a financial accountant to assist her, Amy did an analysis of the most recent financial statements of the hotel. Since the hotel had consistently shown a profit during the past few years, Amy thought that the price of the hotel was reasonable, so she decided to purchase the hotel. She resigned her position, obtained a loan, and purchased the hotel.

During the first year as a hotel manager, Amy received an offer from a tour operator who proposed to guarantee a considerable number of room reservations, including during the off-season. However, she turned down the offer because the tour operator asked for a 20% price reduction compared to the regular room rate. A few weeks later, she decided to shut down the restaurant, located in the main building of the hotel, in order to save expenses. With regard to general expenses, she was particularly concerned with the high room cleaning and service costs. On the sales side, although the reservations for the cheaper standard rooms were a bit sluggish, the more expensive large-size superior rooms had a very good occupancy rate of over 90%.

The following year, there was a severe economic downturn and also a very bad weather season that reduced the number of guests and also caused a resulting mold situation in the hotel building that required expensive repair work. Amy ran short of cash, became emotionally distraught, and eventually had to sell the hotel at a significant loss.

Question:

Using Cost-Volume-Profit Analysis explain potential management errors that Amy had made and could have helped her to improve decision-making and the financial results of the business.

Answer 1

Before the bad weather conditions, amy observed that occupancy rate of luxury rooms is fine but the regular rooms is not that good, she might have converted all the rooms to luxury so that, the volume of revenue would have increased. Which might have helped to cover the losses during adverse times.

During the adverse times, she might have taken insurance prior so that, the loss of revenue and also the damage to the hotel will be insured and the loss will be reimbursed from the insurance company and there won't arise the question of losses.

Amy had a lot of mistakes and her emotions made her to shut down the business.