Performance Management Assignment

This Performance Management Assignment provides a detailed analysis of strategies and policies for promoting business and generating revenues. It includes solutions and answers to questions related to return on investments, break-even analysis, and revenue generation strategies.

PERFORMANCE
MANAGEMENT ASSIGNMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Question ..........................................................................................................................................1
Solutions..........................................................................................................................................1
Answer 1..........................................................................................................................................1
Answer 2..........................................................................................................................................6
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Motive of every business is to earn profit and to have sufficient return over its
investments in the business. For earning sufficient revenues company have to earn profits wit
which it could meet its personal and business objectives. A company has to undertake various
strategies and policies for promoting the business. Whenever a business is planning to adopt any
proposed project it is essential to prior analysis so that it can get the idea about the level of target
it has to achieve(Kienzler and Kowalkowski, 2017). Prior analysis helps to prevent policies and
procedures that might affect the business. Company must analyse the sales it has to achieve for
reaching the expected returns over the investment. The analysis also involve identifying the
break even points and margin of safety levels. In the present report John Taylor has purchased
hotels and made renovations for generating revenues. Taylor wants to earn return of 10% over its
investments. Report will reveal about the return it will be generating if it has occupancy ration of
70 % throughout year. He also has price discrimination proposal for weekdays and weekends for
increasing its revenues for the hotel. Report will provide the strategies it could adopt for
promoting its sales.
Question
Solutions
Answer 1.
In the given question John Taylor has purchased the hotel and made renovations so that it could
generate revenues from it.
Cost of Hotel
Purchase 700000
Renovations 800000
Total cost 1500000
Return on Investments
Investments 1500000
Return on Investments 10.00%
Return on Investment 150000
The Stratford Hotel in Romford Road has been purchased by John Taylor for £ 700000.
He incurred renovation expenses amounting to £800000 on the hotel so that it new customers
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could be attracted towards the hotel. The purchase price of hotel and the expenses incurred for
renovations combined investment amounts to £1500000. Every business owner makes
investments for earning reasonable returns over their investment. John Taylor wants to earn
annual return over capital employed or investment of 10 %. John Taylor for earning the required
return has to generate profits amounting to £150000. The revenues from the hotel have to be
increased for generating required return by taking adequate steps.
Hotel Operates for 50 weeks a year or 350 days a year with twin bedded occupation.
Hotel is having average capacity of 70% during a year. Hotel is charging £40 'per guest per night'
and generated further revenues from bar of £5 per guest per night on an average.
Income Statement of Taylor
Capacity
@ 70%
Capacity
@ 100%
Capacity
Sales 1176000 1680000
(60 rooms * 2 * 70%) = 84
guests
(60 rooms *
2 guests) =
120 guests
(84 guests * ₤40 * 350
days)
(120 guests
* £40 *350
days)
Bar 147000 210000
(84 guests * ₤5 * 350 days)
(120 guests*
£5* 350
days)
Total Revenues 1323000 1890000
Operating costs
Business Rates 160000 160000
Repairs and maintenance 25000 25000
Depreciation 60000 60000
Salaries 150000 150000
Wages 140000 140000
Electrical and utilities 54400 67000
Administration cost 88800 114000
Advertising 40000 40000
Reception, kitchen, bar and 147000 210000
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other staff
Other Costs 29400 42000
Boarding costs
Breakfast 88200 126000
Evening meal 235200 1218000 336000 1470000
Net Income 105000 420000
Assumptions :
 It is assumed that budgeted figures given in question are of 100% capacity.
 Calculations have been made on the assumptions that each room is occupied by 2 guests
per night. Therefore, each room is considered to have 2 guests per night.
 The capacity of 70 % has been calculated on the basis of above assumption.
 It is assumed that each guest staying at hotel will be generating revenues from bar.
Explanations :
On preparing the budgeted income statement of the Stratford Hotel that is operating over
70% capacity during the year. At this level company is earning profit of £ 105000 after covering
all the variable and fixed costs. Hotel if operating at 70 % capacity will have 84 guests per night.
At 100% capacity hotel is assumed to have 120 guests per night. Each room will have two guests
who will be charged £40 per guest. Hotel is generating total revenues from rooms at 70 percent
capacity amounting to £1176000 and from bar of £147000. Aggregate revenues generated by
company are £ 1323000 per annum. For increasing the revenues company have to adopt new
strategies and promotional policies(Kienzler and Kowalkowski, 2017).
Operating costs of the Hotel include both fixed and variable costs. The fixed costs of the
company include business rates, repairs and maintenance, depreciation, salaries, wages,
advertising and semi fixed costs included in Electrical and utilities and administration costs. The
total fixed cost of the hotel amounts to £6300000 per annum. Hotel is required to meet all the
fixed costs irrespective of the capacity at which it is operating. The fixed are to be met even
when company is running at loss. The variable cost of Hotel includes wages of reception ,
kitchen and bar staff, boarding cost for meal and break fast and semi variable cost included in
Electrical and utilities and administration costs. The aggregate variable cost of running the hotel
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is £ 588000. The variable costs of the hotel will vary depending on the capacity and occupancy
during the year. They are constant per unit but vary in aggregate depending the number of guests
arriving in hotel during the year. Variable cost of the company could be controlled by taking
effective policies and procedures. It can control the cost of electrical utilities and administration
cost. Total cost of operating of hotel amounts to £1218000 and the total income left after
carrying out all the operating costs is £ 105000.
If company operates at capacity of 100% with all the rooms occupied with 2 guests it can
earn revenues amounting to £ 1890000. Revenues from rooms will be £ 1680000 and from bar
will be £210000. It is not possible for the company to run at 100% capacity but if it some how
manages to operate at this it could generate profits amounting to £420000. The fixed cost of
company will remain constant only the variable cost will be changing as per occupancy by
guests.
Return over Investments
@ 70% @ 100%
Required Return 150000 150000
Actual Return 105000 420000
Variation -45000 270000
Return 7.00% 28.00%
If company operates at 70 % it is getting return over investment of 7% that is below the required
return over investment by Taylor. If company operates at 100 percent capacity can generate
return of 28% over its investment. For generating the return above 10 % it has to increase it
operating capacity above 70%. This can be increased by adopting or restructuring its sales
strategies and make promotions for attracting customers towards the hotel.
Break-even Analysis
Break even Analysis
Revenues 1323000
Variable Cost per unit 20
Total Fixed Cost 630000
Total Variable Cost 588000
Guests per yea 29400
Break even guests 25200
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Total Fixed Costs ÷ (Average
Revenue Per Guest - Variable Cost
Per Guest
Margin of Safety 4200
(Current Revenues – Break even
point)
Total Revenues - Total Variable
Costs ÷ Total Revenues 0.5556
Total Revenues - Total Variable
Costs 735000
Total Fixed Cost 630000
Break even point 1134000
Total Fixed Costs ÷ (Total Sales -
Total Variable Costs ÷ Total Sales)
Margin of Safety
(Current Revenues – Break even
point) 189000
Interpretation :
Break-even point is defined as the point where total expenses both variable and fixed are
covered by its revenues. It enables the company to know the amount of revenues it is required to
generate for covering its costs. It is challenging task for the hotel industry to calculate the break
even point. Break Even point of Hotel at 70 percent occupancy is at 25200 guests and in amount
it is at £1134000. Hotel is required to have at least 25200 guests and revenues of £ 1134000 for
covering all the costs.
Margin of safety refers to difference between expected amount of revenues and break
even point. This helps in managing the risks associated if company is not able to earn the
required level of revenues. Margin of safety in guests is 4200 and in revenues is £189000.
Calculation of fixed and variable costs
Fixed and variables (@ 100% capacity)
Fixed Variables Total
Electrical and
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utilities
(120 guests*₤1*350
days) 25000 42000 67000
Administration
(120 guests*₤2*350
days) 30000 84000 114000
Fixed and variables (@ 70% capacity)
Fixed Variables Total
Electrical and
utilities
(84 guests*₤1*350
days) 25000 29400 54400
Administration
(84 guests*₤2*350
days) 30000 58800 88800
Other variable cost
100.00% 70.00%
Reception, kitchen,
bar and other staff 210000 147000
(120*₤5*350
)
Other Costs 42000 29400
(120*₤1*350
)
Cost per meal
100.00% 70.00%
Breakfast(£3) 126000 88200
(120*₤3*35
0)
Evening meal (£8) 336000 235200
(120*₤8*35
0)
Answer 2
Taylor is assuming to introduce new strategy for increasing it revenues of the hotel. Hotel is
planning to introduce new tariffs of £50 for business user on 1 guest per room on weekdays and
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£30 on weekend for 2 guests per room. This will help hotel in having occupancy of 90% during
the workdays and 75% during the weekend.
Particulars
Total Capacity
120 guests
per night
Weekdays 6
Weekend 1
Total weeks 50
Total Weekdays per year 300
Total Weekends per year 50
Particulars
Occupa
ncy
Capacit
y
Guests
per
night
Guests
per
year Tariff
Tariff
per year
Bar
profit
per
guest
Revenues
from Bar
Weekdays 90.00% 60 54 16200 £50
£810,000.
00 £5 £81,000.00
Weekends 75.00% 120 90 4500 £30
£135,000.
00 £5 £22,500.00
20700
£945,000.
00
£103,500.0
0
If company follows this discrimination proposal than it will generate separate revenues
for weekdays and weekends. The 90% occupancy means 54 guests per night and at 75%
occupancy means it will have 90 guests per night during weekends. Using this strategy hotel
could generate revenues of £157500 alone on weekends. But hotel during the whole year at
weekdays will be generating revenues amounting to £ 891000 from both rooms and bars.
Income Statement of Taylor
Revenues
Rooms
Weekdays ( £50) £810,000.00
Weekend (£30) £135,000.00
Bar
Weekdays £81,000.00
Weekend £22,500.00
Total Revenues
£1,048,500.
00
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Operating costs
Business Rates 160000
Repairs and maintenance 25000
Depreciation 60000
Salaries 150000
Wages 140000
Electrical and utilities 45700
Administration cost 71400
Advertising 40000
Reception, kitchen, bar
and other staff 103500
Other Costs 20700
Boarding costs
Breakfast 62100
Evening meal 165600 1044000
Net Income £4,500.00
Explanations
Company has generated profits of only £ 4500 if it adopts this strategy. The profits are
significantly low as compared to when it was running at 70% capacity. If the company operates
using this strategy it might suffer significant losses. Hotel should not use this strategy for earning
the revenues and increasing the sales. The strategy give two bedded rooms for single tariff. This
is incurring cost for company. The revenues are not increased but the variable cost of operating
the hotel have not reduced. Therefore this strategy is not successful and should not be adopted by
company.
Fixed and variables
Fixed Variables Total
Electrical
and utilities 45700
(54
guests*₤1*
300 days) 25000 20700
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(90
guests*£1*
50)
Administrat
ion 71400
(54
guests*₤2*
300 days) 30000 41400
(90
guests*₤2*
50 days)
Other variable cost
Weekdays Weekends Total
Reception,
kitchen, bar
and other
staff 81000 22500 103500
Other Costs 16200 4500 20700
Cost per meal
Weekdays Weekends Total
Breakfast(£
3) 48600 13500 62100
Evening
meal (£8) 129600 36000 165600
Rate of Return
Required Return 150000
Actual Return 4500
Variation -145500
The required rate of return is not adequate. The variation between the actual profit and the
required profit is very high. Slight decrease can even lead hotel to losses.
Alternative pricing strategy and promotion strategy
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Pricing strategy:
Taylor can engage in adopting different pricing strategy so that his hotel can grow and
they are able to attract more consumers. Like for example differential pricing strategy can be use
by them, in this hotel can involve in charging different price from different customer. Price that
is being charged by them depends on the financial position of customer. This will also help
company in optimizing their profit(da Silva and et.al., 2018). In general, a company wants to sell
its products or services to a given customer for as much as he is willing to pay. This is because it
might happen that one consumer has more desire for product than other have. Adopting this
pricing strategy can help Taylor in retaining consumers and attracting new potential consumers.
Also this pricing strategy can help Taylor in increasing productivity aspect of hotel. When
organization are better able to analyze consumer demands and put prices on that basis then there
are higher chances of enhancing and increasing the product efficiency of industry. This can also
help firm in growing and achieving their ultimate goals and objectives.
Another pricing method which can be used by Taylor is skimming price. In order to
extend their market, share they can also make use of skimming pricing strategy. In this method
hotel has charged higher initial price at first so that they can cover their initial investment rate
and when the hotel is being set in market, they can charge lower price. So this will also help
them in creating goodwill in market.
Promotional strategy:
In order to reach out large range of consumers, Taylor can also make use of social media
websites like Facebook, Twitter and Instagram. This method is most cost efficient method; it will
help hotel in saving cost(Tanco, Cat and Garat, 2019). Also promoting through social media
website will support Hotel in connecting with large range of consumers. Customers can give
their feedback on social media websites, and hotel can solve query over there(Lim and Choi,
2017). This can help hotel in building up their goodwill and also creating consumer loyalty.
Another promotional method which can be used by Taylor is celebrity endorsement(Hatch and
et.al., 2017). This can also help hotel in getting edge over other competitors. By this method they
will also be able to have competitive advantage. Also it will attract large number of audience
towards hotel. In the advertisement hotel can make customers aware about products and services
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which is offered by them to their consumers. This will also help hotel in creating customer
loyalty(Li and et.al., 2017). Public relation method can also be used by Taylor. In this technique
hotel can engage in organizing and arranging some events in which they will build better
relationship with consumers. In this hotel will analyze needs and demands of customers so that
hotel can provide them and then they will be able to build up customer loyalty. This will also
help them in increasing their profitability and enhancing their operational efficiency. This will
also help hotel in building up positive image in mind of consumers(Liu and et.al., 2015).
CONCLUSION
From the above study it could be conclude that the Taylor should adopt for new strategy that will
help it to increase its revenues. If it operates at 70% capacity than it will generate return of 7%
over its investments that is low for company. For increasing the return over investment it has to
adopt for new strategies that will help it to increase its revenues. The discrimination proposal of
hotel should not be adopted if it has to earn sufficient revenues that can provide Taylor required
rate of return over its investment.
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REFERENCES
Books and Journals
da Silva and et.al., 2018. Operative group of primigravidae: a health promotion strategy. Revista
Brasileira em Promocao da Saude.31(1).
Hatch, M.D. and et.al., 2017. The cost effectiveness of vancomycin for preventing infections
after shoulder arthroplasty: a break-even analysis. Journal of shoulder and elbow
surgery. 26(3).pp.472-477.
Kienzler, M. and Kowalkowski, C., 2017. Pricing strategy: A review of 22 years of marketing
research. Journal of Business Research.78.pp.101-110.
Li, B. and et.al., 2016. Pricing strategy and coordination in a dual channel supply chain with a
risk-averse retailer. International Journal of Production Economics.178.pp.154-168.
Li, H. and et.al., 2017. Multimedia processing pricing strategy in GPU-accelerated cloud
computing. IEEE Transactions on Cloud Computing.
Lim, S. and Choi, Y., 2017. Promotion Strategy and Economic Effect of an Inter-Korean
CEPA. KIEP Research Paper. World Economy Brief, pp.17-20.
Liu, Y. and et.al., 2015. Online purchaser segmentation and promotion strategy selection:
evidence from Chinese E-commerce market. Annals of Operations
Research.233(1).pp.263-279.
Tanco, M., Cat, L. and Garat, S., 2019. A break-even analysis for battery electric trucks in Latin
America. Journal of Cleaner Production.228.pp.1354-1367.
[Online]. Available through : <>.
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