A 1: Case background and site description: general manager (GM) of a budget hotel in Colorado
You have been hired by the general manager (GM) of a budget hotel in Colorado. The hotel is
part of a large economy lodging chain in North America. Economy lodging hotels include Super 8, Motel
6 and Days Inn. They are typically small, free-standing hotels with no food and beverage outlets (i.e.,
restaurants and bars), no conference or banquet facilities, no meeting spaces, and limited services.
There is a single output: the provision of rooms for one or more nights. While there are “single” and
“double” rooms, differences are minor so there is no need to use weighted-average prices or costs.
With a single output, there is one obvious cost driver: the number of rooms rented.
An economy lodging “property” typically has 110 rooms, although size may range from 60 to
175 rooms. Rooms are basic and there are few amenities. Room access is typically from the building’s
exterior. Like chain restaurants, economy lodging hotels develop standard properties to minimize
A typical property is staffed by a GM, five front desk workers, five housekeepers, a head
housekeeper, a laundry worker, and a maintenance worker. Wages for all hotel workers other than
the GM are at or slightly above the minimum wage; this is the result of high employee turnover and
low-skill positions. Recruiting and training costs for employees, other than the GM, are minimal.
The GM has a great deal of autonomy in running the day-to-day operations of the hotel. The
GM is supervised by a district manager who typically oversees eight to fifteen properties, visiting each
property every four to six weeks. GMs are responsible for pricing (with corporate oversight), local
advertising, hiring and terminating hotel staff, selecting local suppliers for unique products or services
(e.g., landscaping, snow removal and major repairs), purchasing and maintaining an inventory of
standard products (e.g., soap, linens, coffee and cleaning supplies), and conducting sales calls with
local businesses. GMs participate in the budgeting process, although the procedure varies somewhat
depending on the district manager and the individual manager (i.e., some area managers prefer a topdown approach whereas others support a participative bottom-up approach).
GMs are evaluated using both financial and non-financial metrics. A modest bonus is awarded
to GMs who achieve their profit goals for the year. Additional bonuses are awarded for achieving
customer satisfaction and internal audit targets. A property’s financial targets for the bonus vary
depending on local economic conditions and the physical condition of the assets. As with the budgeting
process, the district manager may choose to negotiate the target with the GM or simply impose a
target of her/his choosing. GMs who do not achieve a minimum, company-wide audit score (also the
threshold for the bonus) for three years are to be terminated (despite this requirement, the chief
financial officer could not remember this ever happening). The quality target is corporate-wide, but
the specific figure depends on the property’s age (i.e., newer or renovated properties are held to a
higher target than older, more run-down properties).
1. Discuss the outlook of business environment based on hotel’s financial figures.
2. Discuss the cost allocation principles followed. Identify cost object, cost drivers, cost behavior and trend for the Hotel based on 3 years of data.
3. Perform CVP analysis to calculate the break-even sales volume for 2018. Discuss the pros & cons and make recommendations for improvement.
4. Prepare monthly operating budget for 2018. Put yourself in the shoes of operations managiquer to discuss the budget challenges.