Fitzroy Court costing individual assignment brief

2.5 Fitzroy Court costing individual assignment brief
This is an activity on apportionment of costs, breakeven analysis and marginal cost pricing.

At the end of this activity you should be able to:-
• Apportion fixed costs to several products
• Use breakeven analysis to help to determine the effects of different prices
• Judge when apportioned fixed costs may be misleading in decisions about pricing
• Use Excel to create models and charts

You will work on this task in your groups during the pod session in Phase 2 Week 3, but you are required to produce an individual report, outside of this pod session. You may use group calculated data, charts and diagrams, but you MUST write and present the report on your own, using your own words.

The Task
As a newly appointed graduate management trainee you have been asked by the marketing director of Fitzroy Court to produce a short report for the board of directors including models in Excel that allow the directors to consider various pricing options.

Your report should make recommendations about the pricing of all three apartment types being built by the company for weekly rental. In order to make these recommendations your report will have to include:

1. As required by the directors, a note of the break-even points for the upper and lower selling prices for each type of apartment per week

2. Also as required by the directors, calculations of expected net profit per week for each apartment type, at the upper and lower proposed selling prices.

3. As suggested by Katrina, recommendations as to how the cost data should be used in setting prices.

The figures you use to support your report must be clearly presented, properly formatted and correctly described. The directors may ask you to explain your calculations. You will certainly need to use a tabular presentation for some of the data; it will probably help to make things clearer if you use diagrams and/or charts as well.

Submission
Submit an Excel file which includes your report and calculations to your cohort BREO site before the first pod session of Phase 2 Week 5.

Assessment
This individual piece of work accounts for 10% of your Phase 2 marks.

Good pieces of work will show most or all the following characteristics:
• Accurate apportionment of fixed costs and calculation of variable costs
• Accurate calculation of break-even points and profits
• Effective use of MS Excel
• Clear, accurately labelled data presentations
• Well argued commentary on the rationale for the proposed pricing structure
Fitzroy Court – Details
Universal Marketing plc are the developers of a new apartment and leisure complex called Fitzroy Court which is located in the West Country of England. The company needs to decide on a price per apartment per week for the holiday apartments which they are about to offer for rent.

The board of directors have asked that all fixed costs should be apportioned (i.e. shared out) on the basis of the total number of rooms in each apartment. Katrina Petrova, the marketing director, has some doubts about the validity of such calculations for pricing purposes; she agrees that fixed costs must of course be considered in evaluating profits, but she thinks that once you are committed to fixed costs, these should be ignored in setting prices.

The directors have carried out market research and obtained data on prices charged by competitiors for similar apartments, and wish to use this for initial modelling. They would like to establish:
1. The break-even point for each type of apartment if rented at the upper or lower ends of the price ranges.
2. The weekly profit or loss for each type of apartment.
3. Expected total annual profit or loss for the venture, assuming full occupancy.
4. Recommendations for action if their figures indicate low season losses on rental.

The directors have produced the attached information regarding costs, size of apartments and maximum occupancy to help with your calculations.

Universal Marketing PLC

Background Information – Fitzroy Court

Market Research
Studio One Bedroom Two Bedroom
Weekly price range for rental £240 – £300 £320 – £420 £350 – £480

Cost Data

Variable Costs £
Cleaning materials per room per week 0.40
Cleaning cost per room per week 10.50
Garden Maintenance per week (two bedroom flat only) 5.00
Electrical Cost per room per week (average) 3.90
Average Laundry Cost per occupant per week* 3.00

Annual Fixed Costs for the Complex £
Depreciation of Furniture & Fittings 100,000
Administration Costs 200,000
Legal and Financial Costs 15,000
Maintenance Costs – site and facilities 260,000
Gymnasium & Recreation Facilities 125,000
Other Information (needed to calculate annual depreciation of the buildings)
Life of Complex 30 years
Initial Building Cost £4,500,000

Apartment Details
• Every apartment has a kitchen and a bathroom, in addition to its other rooms.
• Studio apartments have a combined living room/bedroom;
• One bedroom apartments have a separate living room and a bedroom
• Two bedroom apartments have a living room, a separate dining room and two bedrooms.

Studio 1 Bedroom 2 Bedroom
No of apartments 6 54 10
Maximum number of occupants 2 4 6
*Regardless of the number of occupants, health and safety requirements are that all bed linen and towels, used or not, are laundered each week when an apartment has been occupied.
Notes

Some variable costs are expressed per room and apartments have more than one room; others are expressed per occupant.

Prices quoted are for “high” and “low” season. The summer season would usually cost more than autumn or winter; the last week in December would be more expensive too. It would certainly be possible to model this by looking at similar companies to see how prices are changed during each week of the year. It is possible, however that taking the mean (simple average) of the high and low season prices will approximate such modelling over a full year (in other words, you can probably assume approximately 26 weeks of high season, and 26 weeks of low season).