Case 2.

Saturn Ltd, a large American hotel organization, has purchased a small rooming house on a property adjacent to one of its main hotels. The acquisition was made with a view to demolishing much of the existing structure and building a custom-designed health club that could be used by hotel guests. The building of the new health club is not due to start for at least a year.

Saturn has been approached by Reg Norman, a contact of the propertys vendor. Norman specializes in arranging golfing holidays. In keeping with the last 5 years, Norman wants to use the building for 30 weeks to house a particular niche market of economy golfers. Norman says that he can provide between six and fifteen guests per week. Under the proposed arrangement, Norman will pay Saturn $200 for each guest provided with lodging and morning and evening meals for a week. Saturns accountant has developed the following cost data, which he believes relevant to the decision of whether to accept Normans offer.

The weekly cost incurred by Saturn per guest:

Food $70 Electricity $6 Laundry, cleaning etc. $10

Casual staff to provide cleaning and other services for 30 weeks: For 6 to 10 guests per week: $22,000 For 11 to 15 guests per week: $34,000

Other incremental costs if building occupied for 30 weeks:

Maintenance and security: $12,000

1. (a) From Saturns perspective what is the breakeven number of guests per week?

2. (b) Calculate the change to Saturns total profit if 10 guest rooms are sold per week throughout the 30-week period.

3. (c) Calculate the change to Saturns total profit if 12 guest rooms are sold per week throughout the 30-week period.