Week 3 Part 1 Quiz Copy

PriceBuy offers package holidays in an all-inclusive resort. It has a contract with the resort owner to rent 20 rooms per week for 30 weeks. PriceBuy has paid € 120,000 for this contract. The food and drinks costs are charged to PriceBuy at a rate of € 200 per week when a room is used. Empty rooms (so rooms that that PriceBuy has not been able to fill with customers) are not charged any costs. PriceBuy sells its holidays for an average price of € 500 per room per holiday week.

How many holiday weeks should PriceBuy sell if its target profit is € 15,000?

PriceBuy management is thinking about offering a ‘non-all inclusive’ option, where guests pay separately for their food and drinks. It would offer this option for a price of € 400, and it expects that this option would be preferred by 40% of guests. Given this expected mix of 40% room only, and 60% all inclusive customers, how many room only holiday weeks are sold at the break-even point?

‘Management should always maximise sales of the product with the highest contribution margin per unit.’ Do you agree? Why?