The ABC Ltd operates a restaurant with recreational facilities. The manager of the complex having 100 rooms, has asked your assistance in planning the coming year’s operations. He is particularly...

The ABC Ltd operates a restaurant with recreational facilities. The manager of the complex having 100 rooms, has asked your assistance in planning the coming year’s operations. He is particularly concerned about the level of profits the firm is likely to earn. Your conversation with the manager shows that he expects occupancy to be 70 per cent during the 200-day season that it is open. All rooms would be rented for `500 per day for any number of persons. On an average, two persons occupy a room. This is the past experience, which the manager believes is an accurate guide to the future. He further informs you that each person staying in the hotel spends `125 per day in the shops (also owned by the company) and `250 in the restaurant. There are no charges for the use of recreational facilities.

For the hotel, the variable costs are `100 per day per occupied room, for cleaning, laundry, and utilities. Total fixed costs for the complex are `60,00,000 per year. You are required to do the following:

1. Prepare an income statement for the coming year based on the information given.

2. The manager believes that if room rent were reduced to `400 per day, the occupancy would increase to 90 per cent. Will you endorse his suggestion of reducing the rent rates?