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Denominator Level

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Submitted By chrisroth
Words 294
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Terminus Hotel
Budgeted Fixed Cost Theoretical Practical Normal Master‐Budget 10.000.000,00 € 10.000.000,00 € 10.000.000,00 € 10.000.000,00 € Budget Capacity Level (Rooms) 500 495 300 200 Budgeted Fixed Cost per day and room 54,79 € 55,35 € 91,32 € 136,99 € Variable Cost per room and 13,00 € 13,00 € 13,00 € 13,00 € Budgeted Total Cost 67,79 € 68,35 € 104,32 € 149,99 €

1. Pearson Travel asks for its regular booking of 25 rooms per day @ 140€. The Management declined the offer after consultation with the Financial Department.

Financial Department is using the Master‐Budget Method for their assesment. As seen in the table above, if the 10M€ is divided by the prevision of 200 rooms and after the addition of the variable costs, the Cost would be higher than the 140€ offer that they have received. After this decission, the forecast for the year will need to be adjusted as the occupancy will be lower now; Master‐Budget 10.000.000,00 € 175 156,56 € 13,00 € 169,56 €

2. Impressa Reisen offered 159€ per day and room and requested 15 rooms per day for the year 2004. Again, management turned down the bid since the calculated cost following the Master‐Budget Method was higher than the offfer. After this decission, the forecast for the year will need to be adjusted as the occupancy will be lower now; Master‐Budget 10.000.000,00 € 160 171,23 € 13,00 € 184,23 €

This type of situation is known as Downward Demand Spiral and it is caused by this type of cost accounting. Should the management consider the Practical Level (or even the Normal) for this case, they would not have lost these customers.

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