Question

PROBLEM 1-8.

Incremental Analysis [LO 2, 3]

The Riverview Hotel is a deluxe four-star establishment. Late on Friday, it had 20 of its 300 rooms available when the desk clerk received a call from the Pines Hotel. The Pines Hotel made a booking error and did not have room for four guests (each of whom had a “confirmed” room). The Pines wants to send its customers to the Riverview but pay the rate the guests would have been charged at the Pines ($160 per room) rather than paying the normal rate of $260 per room at the Riverview.

Required:

a. If the Riverview accepts the guests, what will be the incremental revenue?

b. Provide examples of incremental costs that the Riverview will incur if it accepts the guests.

c. In your opinion, will the incremental revenue be greater than the incremental cost?

Answer 1

A.

Incremental revenue is like marginal revenue. Marginal revenue is increase in revenue for one more unit sold, whereas incremental revenue is increase in total revenue for increase in total units of sale.

So the incremental revenue in this case = 160 x 4 = $ 640

B.

Incremental costs can be

laundry, toiletries, electricity, water , breakfast, parking, meals.

c.

Incremental Revenue is likely to be greater than incremental costs. Here we are not considering the fixed cost of the Hotel room. The variable cost is normally in the range of 25 % to 35% of the rate of the room, so the incremental cost on the higher side will be 35% of 260= $90 which is less than the incremental revenue per room of the hotel.