Introduction
It is necessary to conduct an estimation of potential expenses, the future business with require, along with its expected demand and pricing examination, to evaluate to what extend the chosen activity can be profitable, or in the opposite, unprofitable. The expenses determine the prime cost for the service, which implies that it is significant to reduce the unnecessary expenses to ensure that they, plus the expected profit, are the most optimal and beneficial for both customers and business owners (Taylor, 2004). This paper will examine the main expenses the hotel business will require, estimate the level of these expenses, and provide the list of fixed and variable costs, separating the previous passage.
Required Expenses Explanation
It is possible to list expenses that future hotel businesses will require to examine them in detail further. The first and most significant cost is the rent of the place, which should be considered from the perspectives of location convenience, the size of the space, and the value it. The second vital type of expenses is staff salaries. The next cost is property expenses, which are insurance and taxes. Fixed monthly bill, which is the Internet, and utilities, which are electricity, gas, water, and others, should also be considered. Hourly labor is appropriate in some situations when it is not profitable or possible to hire staff for the full planned salary. Marketing and distribution costs, such as commissions or advertising, are also a part of expenses. Cleaning products buying is the other necessary part of the hotel business maintenance. Finally, even if the restaurant service is not included, it is necessary to provide customers with the opportunity to buy convenient food and beverages at the bar. Despite the potential profit snacks and beverages selling can bring, overordering may conceive the opposite situation and turn it into unwanted expenses.
Fixed and Variable Expenses Estimation
From module 1, it is known that the average and the most optimal, from the quality of service and demand perspective, price per room per night in Jacksonville and surrounding areas is about 130 dollars. Therefore, taking into consideration the effectiveness and the popularity of the business, used as reference one, which is Hotel Final, expenses estimation will be based on potential competing with this facility’s service, as it is possible to vary costs to find the balance between quality and value.
The size of the business is expected to be intermediate, as it is unlikely to have a significant demand, which makes a compact hotel to be an attractive one. Therefore, the number of rooms is chosen to be 10, with an average size of each approximately 300 square feet. In general, the size of the hotel is expected to be approximately 3800 square feet. The rent of an apartment of such size is expected to be about 15 dollars/square feet per year, which is approximately 57000 dollars per year or 4750 dollars per month. The necessary staff is two full-time hostel managers/receptionists with a 3200 dollar salary each. One hostel housekeeper, who is paid 10 dollars per hour, with an estimated time to clean one room is 20 minutes, which can be estimated as 100 dollars/month per room. On average, businesses pay 4500 dollars a year for premium health insurance per full-time worker, which is 750 dollars per month. The property expenses are expected to be 700 dollars for insurance per year. Fixed monthly bills are expected to be 50 dollars per month, while average utilities per room are 70 dollars/month. Cleaning products are expected to be 15 dollars/month per room, and food and beverage expenses should not exceed 10 dollars/month per room. Marketing and distribution costs are expected to be 10 dollars/month per room.
According to Taylor (2014), “Fixed costs are expenditures that do not change regardless of the level of production. Variable costs, on the other hand, are incurred in the act of producing—the more you produce, the greater the variable cost” (“The Structure of Costs in the Short Run”). Therefore, rent, property expenses, fixed monthly bills, staff salaries, and health insurance are fixed costs (Clifford and Hill, 2016, 3:43-4:19). Simultaneously, hourly labor, utilities, marketing and distribution costs, cleaning products, and food and beverage inventory are variable costs (Taylor, 2014, “The Structure of Costs in the Short Run”). The results of monthly expenses estimation are presented in Figure 1.
Figure 1. Fixed and variable costs estimation.
It is possible to notice that in the event of only one room is booked for the month, the expenses of the hotel are 12213 dollars. But if every of 10 rooms is booked, the expenses are 14058 dollars in total or 1405,8 dollars per room, as, despite an increase in variable costs per room, the fixed cost is divided by the number of rooms booked. One room’s desirable and competitive price per night is 130 dollars, which means that the maximum potential revenue is 39000 dollars per month, which is not possible usually. However, under beneficial circumstances, the successful hotel will regularly cover all expenses, and its owner will obtain a significant profit.
References
Clifford, J., & Hill. J. (2016). Revenues, profits, and price. CrashCourse. Web.
Taylor, T. (2014) Principles of Microeconomics. OpenStax College. Web.