Garnet Hotels: Evaluating Investment Options for London Expansion

Option 1: City Center Budget Hotel

You are required to work in Pairs to answer the following:

Garnet Hotels operates a chain of hotels in historic towns and cities in the  UK. The hotel group is considering expanding its operation in London by adding additional room space. The company is considering investing in ONE of the following two options i)    A city center budget hotel offering 80 compact rooms and minimal additional extra services.  This would be a new venture for the hotel group designed to meet growing demand for centrally located hotels attracting guests on a low budget for short breaks and low budget business travelers. The group have identified an existing building that is available on a rental lease and could be re-fitted; it is estimated that the re-fit would take 6 months.

Features of the hotel would include:
Compact rooms with ensuite shower rooms
Online reservations and digital check-in service and key drop
Café lounge open 6am to 8pm serving light meals, tea and coffee and refreshments.
Mini self-check-in gym
Online check-in meeting rooms
High speed internet

ii)    Expand an existing boutique hotel, which is situated in a busy upmarket suburb.The hotel has identified space to build a side block adding 40 large bedrooms to the existing 90 available on site. The hotel group is well established in this sector, the existing portfolio of boutique hotels is designed to serve demand for luxury small hotels within 30 minutes of the city center for business travelers, short and long stay guests. It is estimated that it would take 18 months.to complete the project.

Hotel features already include:
Large ensuite bedrooms
Online reservations and telephone bookings
24hour reception staff and room service
Full dining options in restaurant and café/bar lounge
Spa and treatment rooms and gym facilities
Meeting rooms, conference facilities and events venue

You have been invited to write a report evaluating each option. Outline how planning, decision making and control could help with these decisions. Your discussion should identify fixed and variable costs and any other factors that you feel are relevant including any non-financial costs and benefits.

The management accountant has estimated some costs if Garnet Hotels chooses to open the new budget hotel, as follows:

New Budget Hotel Costs    £
Variable costs per overnight stay in room    12.50
Monthly maintenance & cleaning costs shared areas    6,500
Other Annual Overheads    3,134,000
Monthly Group Overhead costs    150,000

Market research has revealed the following:
At weekends and some peak periods the hotel might be full, however, at other times occupancy will be lower resulting in average annual room occupancy being 80%, if the hotel charges competitive rates. A nearby competitor offers similar accommodation at a fixed price of £175 per night. Garnet hotels would like to achieve a minimum target annual profit of £760,000 to contribute towards group overhead costs; group overhead costs will be unaffected if the project is rejected.

Using Cost-Volume- Profit analysis you have been invited to write a report offering advice to Garnet Hotels including pricing options for the new budget hotel. Refer to the data above and illustrate your answer with diagrams and include any relevant calculations. Define any management accounting terms used.  Consider any limitations to your analysis.