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THH3102 Cost and Performance Management for Tourism and Hospitality

Task 3C:

Executive Summary

This report is based on the Cost and performance management for Tourism and Hospitality i.e. it is about the RM at Lakes Resorts in Lakes Entrance Victoria. In this report, Heba the DOSM, and Theo, the manager who handles and takes their decision regarding the resort as he received the two offerings, and he wants to determine which would generate higher revenue for the company over the Christmas holiday, from December 23 through December 29, 2022. The management has chosen to charge $120 per night for rooms at the rack rate to compensate for the loss from the previous year.

Both they approached but they quoted different prices i.e. $110 per night and $100 per night. So, RM committed needs to know what should be done to reduce the cost or expenses. Therefore, in this report, they differentiate all the costs i.e. Fixed cost and Variable cost and analyze the cost to their cost behaviors and provide suggestions that how to transform from variable to fixed cost. As this committee want to know what costing will arise for each room by computing the ADR, REVPAR, and so on, and in the end, they recommend which offer is best or suitable to recover last year’s expense and make profitable business


Cost Analysis and Break-Even Analysis

In cost analysis, they need to differentiate both the cost i.e. Fixed cost and Variable cost. Whenever there is a variation in activities and product sales, the differentiation among categorizing operational expenses and associated expenses as stable or changing is made between fixed costs and overhead expenses.

Fixed costs are outlaid that have been planned and break the same over time. These expenses are not affected by output or how well the company is doing. They thought about the costs that they would experience if they temporarily shut down their business when calculating their fixed costs. Internet expenses, cleaning expenses, and other operating expenses would still be paid by the business. No matter whether there is a Resort, every small resort owner will have some fixed costs. Fixed costs are simpler to budget for because they remain constant from one fiscal year to the next. As they are unrelated to operations or volume, they are also less within their management than variable costs. However, variable expenses fluctuate over a predetermined period and therefore are directly related to the company’s activity. These depend on how well the company performs and how many services it provides (Kotas, 2014)

Therefore, there are some reasons for the fixed /variable cost based on the cost behaviors because the cost in reaction to a change in activity, costs may remain constant or change correspondingly. It is simpler to develop a budget, a forecast, and figure out how much profit a new product will bring in, and choose between two options when you are aware of how a cost responds to changes in activity levels. The amount of production has little bearing on how fixed costs behave. The overall fixed expenses remain consistent within the recommended range. But as output increases, the total fixed cost decreases because the same fixed costs are spread across a greater amount of units. The quantity of product produced impacts how variable costs behave and how they fluctuate. Variable costs include, for example, labor, commissions.

There are some recommendations to convert from the cost of the variable to fixed or improved variable cost as per the cost behavior because it exhibits a more stable per-unit cost, which in turn demonstrates a more stable revenue growth, operating profit, and return on capital (Sintha, 2020).

– Since productivity levels are strongly correlated with the number of orders and hotel capacity, variable expenses vary according to those levels. Businesses would incur more running costs if occupancy declines, and conversely.

– Due to incentives, the advertisement costs will rise when bookings are high. Additionally, when their occupancy rate is poor, they must be or should be spending so much on promotion to draw in guests.

– Proper scheduling should be there as although businesses can employ the prediction to figure out occupancy levels and balance demand with staffing needs, they can reduce labor expenditures.

– For reducing the operating cost, maintaining their utility bills low allows them to save money and gain the trust of their customers. Track their energy use is the first step in finding innovative solutions to reduce costs  i.e. there should be a Utilization of energy-saving lighting and putting occupancy sensors to make absolutely sure they turn off after visitors leave the space (Pajrok,2014)

By assessing a hotel’s BEP, hotel asset managers can decide if it would be best to wait until greater occupancy rates are possible before reopening the property. They identified the fixed cost and variable cost for analyses of the breakeven point of both offers.Therefore, by dividing the whole fixed costs by the average room rate, the break-even level is determined.

 There are some calculations are given below:

Calculation of BEP
Heba Theo Normal estimated occupancy
Total variable costs 20315 22346.5 26120
Total fixed costs 18433.3 20276.663 23700
Room price 770 700 840
Room units 70 75 85
Selling cost 53900 52500 71400
variable Cost per unit 290.214 297.953333 307.29412
Contribution margin 479.786 402.046667 532.70588
Break-even point 38.4199 50.4336056 44.489841
  1. Analyze the ADR, REVPAR, ADR index and REVPAR index

There are currently two offers that should be taken into account. In the case of Heba have been instructed by the DOSM to compile a statement on which of these two offers is the more profitable using the facts below. They believed as a salesperson, that they could sell an additional 15 rooms per day for transit riders during the time frame at the regular rack pricing of $120. Based on given data, they differentiate the fixed cost and variable cost i.e.

Differentiation of the costs
Estimated expenses Heba Theo
Fixed cost
Full time wages to the employees 20000 22000
Phone and internet charges 400 440
Superannuation charges 3300 3630
Total fixed costs 23700 26070
Variable cost
Casual staff wages 13000 14300
Electricity charges 5000 5500
Water charges 2400 2640
Garden maintenance charges 3360 3696
Guests laundry charges 660 726
Room cleaning charges 1700 1870
Total variable costs 26120 28732

So, the Lake Resort RM committee finds that which offer is more suitable as they are comparing the last year expenses for the Christmas period with 100 percent occupancy. Therefore, the Heba has estimated to upsurge all the cost by 15 percent.

Calculation of ADR and RevPAR
Occupancy ADR RevPAR
Total rooms 90 94% 815.29412 770
Total room revenue 69300 815.294
Rooms sold 85

Therefore, the comment on the ADR and RevPAR is that it is an extremely important statistical approach whereas the annual rental revenue (ADR) is used to calculate the amount that each room contributes to the proprietor. Earnings per occupied space (RevPAR), a metric used in the hospitality industry, is used to evaluate service quality. The statistic is calculated by multiplying the average daily rate (ADR) by the occupancy levels of the hotel. The ability of a hotel to averagely fill its available rooms is shown by its RevPAR. Additionally, it assists in examining the room’s capacity to draw customers and generate revenue for the business from many angles. ADR and RevPAR analysis shows that they are 815 dollars and 770 dollars, accordingly (Kim & Brymer, 2015).

  1. Decision/ Recommendations

The paper shows and signifies the break even analysis, cost driver and the cost behavior of the as per the execution of the analysis. The report also evaluates the imperatives of the cost management and different option which the analyzed options. Different businesses operate on a profit percentage and change the activities because of the change in the budget.

Cost planning and analyzing is essential because:

It helps in planning the profit: It is concerned with the decisions and selection of the distinct alternatives that can be seen be evaluated for the execution of the decision at the workplace.

For controlling the costs: Classification of the costs into variable costs and fixed costs so that the company can know which costs is needed to be controlled.

Fixing selling price: Separation of the variable and fixed costs is needed for the adoption of the selling price and its policy as per the total costs (Drury, 2018).

Break even analysis and marginal costing- It is imperative to classify the variable and fixed cost.

Absorption of the overheads- This supports in the overhead absorption in terms of a technique that is needed for the absorption adoption which shows the overhead’s nature.

Budgetary control- The budget is designed as per the accordance of the activity level and the behavior of cost is very essential.

Helps in decision making process.

As per the breakeven analysis of the fixed and variable costs which certainly shows the cost behavior deriving the costs and analyzation of the project and acceptance of the offers that are to be seen as per the analysis.

The two offers that can be seen as follows:

Offer 1: This offers shows that Heba was approached by the entrance of the lakes and the association that shows the reservation of almost 70 rooms. The discounted price for this offer is 110 dollars for each night. This offer shows that the total amount of variable costs for this offer is amount $26120.. The fixed costs of this project is $23700. As per the calculation of break even analysis, the selling cost related to this project can be seen as 53900. The breakeven point of this offer and observation is 38.41 dollars.

Offer 2: Tafe students approached Theo which shows that they need reservation for 75 rooms for each night and the amount is 100 dollars. It is observed that 10% of the price is expected to be increased in comparison of the last year. The Company Lake resorts evaluated the best offers which show variable costs for the 2nd offer is 28732 dollars and the fixed costs are reported as 26070 dollars. The selling costs related to this offer is 52500 dollars. The breakeven point for the offer is 50.43 (Shively & Galopin, 2013).

With the help of analyzation of both the breakeven point this can be evaluated that the most beneficial deal for preference is Heba’s deal as it has less amount of breakeven point that means more amount of profit that the company earns. Break even pint plays a very imperative role in terms of the evaluation of the profitable option for the company and helps in taking the best decision for the company so that company can make more amount of profit and can be can help in further evaluation.

Moreover the evaluation of ADR and REVPAR  is done with the help of evaluation. ADR is utilized for the calculation of the average rental revenue that is a very essential performance indicator which shows each room’s amount that it brings to the owner. With the help of this, the competitor’s price can be compared and strategic decision can take place. Moreover revenue per available shows the amount generated by each room, and it is not necessary whether they are booked or not booked. It is the most important metric to measure in the hospitality industry. It helps in deriving an accurate picture of the company and its ability of making profit. Moreover it helps in analyzing the room’s ability to fill in and derive profit for the company in different perspectives. As per the analyzation of ADR and RevPAR, they are 815 dollars and 770 dollars respectively (Marglin, 2014).


Drury, C. (2018). Cost and management accounting. Cengage Learning.

Kim, W. G., Lim, H., & Brymer, R. A. (2015). The effectiveness of managing social media on hotel performance. International Journal of Hospitality Management44, 165-171.

Kotas, R. (2014). Management accounting for hotels and restaurants. Routledge.

Marglin, S. A. (2014). Public investment criteria (routledge revivals): Benefit-cost analysis for planned economic growth. Routledge.

Pajrok, A. (2014). Responsible accounting in the hospitality industry. Journal of Education culture and society5(2), 53-60.

Shively, G., & Galopin, M. (2013). An overview of benefit-cost analysis. Accessed online athttp://www. agecon. purdue. edu/staff/shively/COURSES/AGEC406/reviews/bca. htm.

Sintha, L. (2020). Importance of Break-Even Analysis for the Micro, Small and Medium Enterprises. International Journal of Research-GRANTHAALAYAH8(6)

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