Question 12.7: It is late at night and a customer arrives at a motel just o...
It is late at night and a customer arrives at a motel just off the highway. The customer has only $30 dollars and tells the motel manager that he will take a room for $30. Otherwise, he will sleep in his car at the next service area. The normal price of a room for the night is $70, but the motel is only 30 percent full and very few new customers are expected that night. The variable cost of renting the room including linen, maid service and utilities is $20. The fixed cost of operating the motel is $1 million per year. Should the motel manager take the customer’s offer and rent the room for $30?
Given that the motel has excess capacity and the motel will lose this customer if this one-time offer is refused, the motel manager should accept the offer. The contribution margin of the additional room rental is $30 – $20, or $10.