for a more thorough understanding of this business concept) the front desk clerks are fixed and not variable.<\/span><\/span><\/p>\nOK, how much do the variable costs add up for one room for one night?\u00a0 Let\u2019s break it down:<\/span><\/p>\nUtilities \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$2.70<\/span>
\nCleaning\/Maintenance Staff \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 9 .45<\/span>
\nCleaning Supplies \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0.83<\/span>
\nPaper Products \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 .73<\/span>
\nFood (Breakfast Bar) \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 .94<\/span>
\nFood Service \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0.62<\/span>
\nConsumables (trash bags etc) \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0.37<\/span><\/span>
\nTotal all Variable Costs \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$15.64<\/span><\/p>\nTotal costs for each room each night is about $35. Note, $19 of this is fixed and $16 is variable. Wait a minute! It was stated earlier that variable costs run about 30% of all costs. But based on this information, variable costs are 45% of all costs. Well, that is true. But this assumes that each room is filled each night no matter what. Therefore the fixed costs are spread over all 140 rooms. But the reality is that not all the rooms are filled each and every night. I guarantee you will fill all the rooms on Year Year\u2019s Eve, but not necessarily on New Year\u2019s Day. If your occupancy rate is 50% for the entire year, then what is the ratio? Let\u2019s do the math.\u00a0<\/span><\/p>\nIf occupancy is 50% then we really only need to double the fixed costs per room as those rooms being used must absorb the fixed costs for the entire hotel that night. This means fixed costs at 50% occupancy equals $38 per night per occupied room. The variable costs for that room are the same at $16; therefore $16 is 30% of the total costs (16 divided by 54 total costs) for that night.\u00a0<\/span><\/p>\nHow can one guest make a difference?<\/span><\/p>\nMarginal Value of One Guest (Head on a Bed)<\/span><\/strong><\/h2>\nAlright, let\u2019s remember that every guest that comes into our hotel costs $16 to serve that night. If we have a guest that just walks in off the street and says I want to rent a room, how much is he going to cost, $16. As long as we charge at least $16, we will have lost nothing in the exchange. He uses one of the rooms and he neither costs us money nor makes us money. Let\u2019s say we charge him $86 for the one night. His use of the room contributes $70 ($86 – $16) towards payment of the fixed costs. That is, he is generating a marginal $70 of value for the hotel. This is where the saying heads on beds is sourced. He is contributing cash towards paying the fixed costs of the hotel.<\/span><\/p>\nNow I know a lot of you are shaking your head because think about it; he is one guest and really is $70 that lucrative? In the overall scheme of things, $70 is not that significant. It will barely dent the $79,000 of fixed costs. But let\u2019s make some reasonable assumptions and do some more math. Let\u2019s say that our occupancy is 30% and we charge $90 per night for the room. Now I know we have different rates for different rooms but let\u2019s just for the sake of analyzing the marginal value of a guest make every room a one bed room and for some strange reason, only individuals rent the rooms. If we have a typical 30 day month then we will rent out 1,260 bed nights (140 rooms X 30 Days X 30% Occupancy), which means we will generate $113,400 of revenue for the hotel.<\/span><\/p>\nNow in accordance with our variable costs formula from above, the variable costs will equal $20,160 (1,260 bed nights X $16 in variable costs). Right now the financial report will look like this:<\/span><\/p>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Single Bedroom Stays (1,680 Bed Nights)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $113,400<\/span>
\n<\/span>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Variable Costs \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a020,160<\/span>
\n<\/span>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Gross Margin\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $ 93,240<\/span><\/span><\/span><\/p>\nWe know fixed costs are $79,000 and therefore we will generate a profit of $14,240. Well, this is great! We made money this month. But if we rented to the one more guest as identified above, our profit will increase $70 to $14,310. Not a big deal is it? Well it is a \u00bd % increase in profit. Really \u00bd of 1% increase; you may not think of this as a lot but let\u2019s carry this a bit further and rent one more bed for each night. Now we\u2019ll have a 30 day increase at (let\u2019s stick to the standard rate of $90 per night) which equals $74 per night for 30 nights. That is an increase of $2,220 or a 15.5% increase in profit.\u00a0<\/span><\/p>\nSo one more head on a bed each night makes a significant difference in the hotel\u2019s bottom line. This is due to the high fixed costs and low variable costs. If variable costs were $30 each night and the fixed costs remained at $79,000, with a 30% occupancy rate at $90 per night, our gross margin would equal $75,600. This is $3,400 shy of the amount we need to cover fixed costs.<\/span><\/p>\nThe math simply reinforces the value of a single additional head on a bed when the variable costs are so low in comparison to the rental income earned for that one night.<\/span><\/p>\nAggregated Value of Exercising Heads on Beds<\/span><\/strong><\/h2>\nTo really drive home the point, an illustration of this concept with three different approaches for the hotel is presented. The first column will represent the hotel using the national registration system exercised by its franchisor and occupancy is 35%. The next column identifies where the hotel uses the local chamber of commerce and a secondary website registration system to increase the occupancy to 37%. The final column represents what happens when one of the clerks negotiates a deal with the local university whereby any guests arriving in town and using this hotel will be charged only $65 per night. The university guarantees 200 guests per year and that is exactly the number that shows up throughout the year.<\/span><\/p>\nAgain, the conditions are the same as above, the rent is $90 per night, variable costs are $16 per night and our fixed costs remain at $79,000 per month. Let\u2019s see the value of adding 200 more heads on beds at a discounted rate.<\/span><\/p>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a035% Occupancy \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a037% Occupancy\u00a0 \u00a0 \u00a0 \u00a0 \u00a037% \u00a0w\/University Contract
\n<\/strong><\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a017,885 Bed Days\u00a0\u00a0<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a018,907 Bed Days\u00a0<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 19,107 Bed Days
\n<\/span><\/strong><\/span>Single BR Stays\u00a0 \u00a0 \u00a0 \u00a0$1,609,650\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$1,701,630\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$1,714,630
\n<\/span>Variable Costs\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0286,160<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 302,512<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 305,712<\/span>
\n<\/span>Gross Margin\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$1,323,490\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$1,399,118\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$1,408,918
\n<\/span>Fixed Costs\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0948,000<\/span> \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0948,000<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 948,000<\/span>
\n<\/span>Profit\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$375,490 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$451,118\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $460,918<\/span><\/span><\/p>\nWow, look at the difference! The additional 200 bed days at a discounted rate ($65 instead of $90) equates to an additional $9,800 of profit. Look at the difference of 37% occupancy over 35%. This is a marginal 1,022 bed nights over the course of a year and the profit increases a staggering $75,600! This is a mere 3 additional guests per night to achieve a 20% increase in profit.\u00a0<\/span><\/p>\nThis truly illustrates the value in the aggregate of getting more heads on beds. Those programs of aligning with certain organizations to house their guests when they come into town or any other program that shows any slight opportunity will make a big difference in the bottom line. This is because in this industry, variable costs are so low, any marginal increase in guests (heads on beds) adds a lot of cash to the coffers. Act on Knowledge<\/strong>.\u00a0<\/span><\/span><\/p>\n
![\"Key](\"https:\/\/businessecon.org\/wp-content\/uploads\/2015\/03\/Key-Image-e1426970788743.jpg\")