Operations Management

Module 4 – Case Study

Caesars Palace® Las Vegas made headlines when it undertook a $75 million renovation. During the renovation, the hotel closed its then-named Roman Tower, which was last updated 14 years prior, and started a major renovation of the 567 rooms housed in that tower. On January 1, 2016, the newly renamed Julius Tower reopened, replacing the Roman Tower. In addition to renovating the existing rooms and suites in the former Roman Tower, 33 guest rooms were added to the Roman Tower. With the renovation completed, Caesars expects the Julius Tower room rate to average around $150 per night. This increase, a $25 or 20% increase, reflects, in part, the room improvements. Julius Tower expects to have 16,000 room nights booked per month, which is a 88.88% occupancy rate (16,000 rooms booked / (600 rooms available x 30 days per month)). Caesars’ target operating income for Julius Tower is $2,000,000 per month.

Assume that the annual fixed operating costs for the Julius Tower are $4,680,000. This amount represents an increase of $200,000 per year compared to pre-renovation. Also, assume that the variable cost per hotel room night after the renovation is $27; before the renovation, the variable cost per room night was $20.

Instructions:

Assume you work in the accounting department of Caesars Entertainment and your supervisor, Logan Lacy, provides you with the above information and asks you to use the What-if Analysis tool in Excel to analyze sales price, volume, and profit related to the Julius Tower. For the What-if Analysis:

• Go to Learning Objective 6 in Chapter 7 of the textbook and follow the instructions – How to Use the “What-If” Analysis to Create a Data Table

• The profit calculation should be for a one-month period using Caesars’ information above for the Julius Tower (i.e., after the renovation).

• Sales price is the sales price per room per night – use a range of $50 to $200 in increments of $10. • Volume is the number of hotel room nights in a month, assuming 30 days per month – use a range

of 1,000 to 20,000 in increments of 1,000.

Perform the above What-If Analysis in Excel and think about Logan’s below questions. Then, write a memo to Logan in Word summarizing your findings and providing your responses to Logan’s questions.

1. Assuming costs remain unchanged, in order for Julius Tower to break even: a. How many hotel room nights need to be booked per month at $150 per room night? b. What sales price per room night needs to be charged for 16,000 room nights per month?

(Hint: Use the What-If Analysis data table to identify the break-even point in the respective column (sales price per room night) or row (number of hotel room nights). Then, provide your answer as a range of from the data table such as, Julius Tower needs between #### and #### hotel room nights per month booked at $150 to break even.)

2. Assuming costs remain unchanged, in order for Julius Tower to reach the monthly target operating income:

a. How many hotel room nights need to be booked per month at $150 per room night? b. What sales price per room night needs to be charged for 16,000 room nights per month?

3. Without increasing the number of hotel room nights booked per month or increasing the sales price

per room night, the other option to increase operating income to the monthly target is to reduce costs. Provide 5 examples of costs typically associated with a hotel that Julius Tower could evaluate for potential cost reductions. For each cost, state if the cost is a variable cost or a fixed cost for Julius Tower.

4. Is Julius Tower at risk of not reaching break-even? Explain why.

5. If you were the manager of Julius Tower, would you think Caesars’ target for monthly operating income of $2,000,0000 is too high, too low, or about right for Julius Tower? Explain why.