Question

Suppose that the current total revenue of a particular lodging establishment is $900,000. At this revenue level, the management of the hotel is indifferent between selecting a fixed or variable lease option for the property. If the management foresees a constant increase in the revenue levels for the near future, what should be the management’s best strategy for choosing the lease options?

None of the above.

Management should choose fixed lease option at any revenue point beyond current revenue of $900,000 if they expect a constant increase in revenue levels.

Management should keep being indifferent between the fixed and variable lease options if they expect a constant increase in revenue levels.

Management should pick variable lease option beyond current revenue of $900,000 if they expect a constant increase in revenue levels.

Answer 1

Given the currrent total revenue of a lodging establishment is $900,000. At this revenue level it is indifferent between fixed or variable lease.

If the management forsees a constant ncrease in the revenue levels.

The management has to opt for fixed lease, because if they opt for variable lease, the lease expenses increases with the increase in revenue. So in order to mnimise the lease expenses it is advisable for the management to opt for fixed lease.

Hence the option " Management should choose fixed lease option at any revenue point beyond current revenue of $900,000 if they expect a constant increase in revenue levels." is correct