Sunrise Hotel and Spa in Sri Lanka offers luxury adult breaks through exclusive travel agencies.
It has been approached by a specialist business travel agency to host a large party of guests for one night, at a price of $400 per person. This price is significantly lower than that charged to its usual guests.
The manager is considering whether to agree to this special order and is considering the hotel's cost data:
Hotel Stays: Full cost data
|
Direct labour
|
$84
|
Direct materials
|
$72
|
Overheads Apportion
|
$316
|
Full unit cost
|
$472
|
[a] Calculate the contribution to indirect costs if Sunrise Hotel & Spa accepts the special order. [1 mark]
[b] Should the manager accept the special order? Explain your answer. [4 marks]
Step 1: Total Direct Costs and Subtract from the Selling Price
[1]
Step 2: Decide whether the special order should be accepted, and explain your reasoning
The manager should accept the special order [1]. It would make a positive contribution of $244 to indirect costs [1], though it would not contribute to increased profit as the full unit cost is $472, some $72 higher than the selling price of $400 [1]. Given that the normal selling price is 'significantly higher', the hotel would be likely to be making a significant profit on hotel stays at other times [1].