Project 3 Revision of wrkbk and Report to Management
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MBA620Project3work_book-corrections-Final.xlx.xlsxInstructions
Instructions Read and follow these instructions to complete the workbook. 1. To complete the Income Statement worksheet, Balance Sheet worksheet, and Cash Flow worksheet: a. Visit the SEC website at sec.gov and find the Choice Hotels (CHH) 10-K report for 2017 and 2016. b. Collect Marriott International's 10-K 2017 and 2016 data from the Securities Exchange Commission website. c. Complete the percent change columns on the right side each table of the workbook. d. Answer the questions in the space given. 2. Given the supplied data in the Cost and Investing worksheet, answer the questions in the space provided. 3. To complete the Budgeting worksheet and Profitability worksheet: a. Solve the ratios provided. b. Answer the questions in the space given.
Income Statement
| CHH 2017 10-K Report | CHH 2016 10-K Report | MAR 2017 10-K Report | MAR 2016 10-K Report | ||||
| Choice Hotels 10-K | Marriott International 10-K | ||||||
| 2017 | 2016 | (2017/2016)-1 | 2017 | 2016 | (2017/2016)-1 | ||
| Account Name | 2017 10-K | 2016 10-K | Percent change from 2016 to 2017 | Account Name | 2017 10-K | 2016 10-K | Percent change from 2016 to 2017 |
| REVENUES | REVENUES | ||||||
| Royalty fees | $ 345,302 | $ 320,547 | 8% | Base management fees | $ 1,102 | $ 806 | 37% |
| Initial franchise and relicensing fees | $ 26,262 | $ 23,953 | 10% | Franchise fees | $ 1,618 | $ 1,169 | 38% |
| Procurement services | $ 34,661 | $ 31,226 | 11% | Incentive management fees | $ 607 | $ 425 | 43% |
| Marketing and reservation system | $ 567,083 | $ 525,716 | 8% | Owned, leased, and other revenue | $ 1,802 | $ 1,126 | 60% |
| Other | $ 34,048 | $ 23,199 | 47% | Cost reimbursements | $ 17,765 | $ 13,546 | 31% |
| Total revenues | $ 1,007,356 | $ 924,641 | 9% | Total revenue | $ 22,894 | $ 17,072 | 34% |
| OPERATING EXPENSES | OPERATING COSTS AND EXPENSES | ||||||
| Selling, general and administrative | $ 163,377 | $ 148,728 | 10% | Owned, leased, and other-direct | $ 1,427 | $ 900 | 59% |
| Depreciation and amortization | $ 12,431 | $ 11,705 | 6% | Reimbursed costs | $ 17,765 | $ 13,546 | 31% |
| Marketing and reservation system | $ 567,083 | $ 525,716 | 8% | Depreciation, amortization, and other | $ 290 | $ 168 | 73% |
| Total operating expenses | $ 742,891 | $ 686,149 | 8% | General, administrative, and other | $ 894 | $ 704 | 27% |
| Gain (loss) on sale of assets, net | $ (32) | $ 403 | -108% | Merger-related costs and charges | $ 159 | $ 386 | -59% |
| Operating income | $ 264,433 | $ 238,895 | 11% | Costs and Expenses, Total | $ 20,535 | $ 15,704 | 31% |
| Operating income | $ 2,359 | $ 1,368 | 72% | ||||
| OTHER INCOME AND EXPENSES, NET | Gains and other income, net | $ 688 | $ 5 | 13660% | |||
| Interest expense | $ 45,039 | $ 44,446 | 1% | Interest expense | $ (288) | $ (234) | 23% |
| Interest income | $ (5,920) | $ (3,535) | 67% | Interest income | $ 38 | $ 35 | 9% |
| Other gains | $ (3,229) | $ (1,504) | 115% | Equity in earnings | $ 39 | $ 10 | 290% |
| Equity in net (income) loss of affiliates | $ 4,546 | $ (492) | -1024% | ||||
| Total other income and expenses, net | $ 40,436 | $ 38,915 | 4% | ||||
| Income before income taxes | $ 223,997 | $ 199,980 | 12% | Income before income taxes | $ 2,836 | $ 1,184 | 140% |
| Income taxes | $ 109,104 | $ 60,609 | 80% | Provision for income taxes | $ (1,464) | $ (404) | 262% |
| Net income | $ 114,893 | $ 139,371 | -18% | Net income | $ 1,372 | $ 780 | 76% |
Questions: 1. Based on your horizontal analysis of Choice Hotels' and Marriott International's total revenue, total expenses, and net income, which company would be a more attractive target for an acquisition by the equity firm and why? 2. Given the changes in total revenue, operating income, and net income from 2016 to 2017, did Choice Hotels or Marriott International experience more change? Which area (total revenue, operating income, or net income) changed most?
Answer questions 1 and 2 here. 1.) Marriot International would be more attractice for acquisition because their total revenue has increased Year-Over-Year and their Net Income has increased YOY, unlike Choice Hotels who saw a loss in Net Income YOY. Additionally, Marriot's largest expense, Cost Reimbursements, is immidediately canceled out by the matching Revnue, Cost Reimburesments. This leaves little worry in terms of paying back short term lenders/expenses. 2.) Analyzing Choice Hotels' and Marriot International's Total Revenue, Operating Income, and Net Income, Marriot International experienced more change, with Net Income experiecing the most change.
https://www.sec.gov/Archives/edgar/data/1046311/000104631118000006/0001046311-18-000006-index.htm https://www.sec.gov/Archives/edgar/data/1046311/000104631117000006/0001046311-17-000006-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828018001756/0001628280-18-001756-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828017001506/0001628280-17-001506-index.htmBalance Sheet
| CHH 2017 10-K Report | CHH 2016 10-K Report | MAR 2017 10-K Report | MAR 2016 10-K Report | ||||
| Account name | 2017 | 2016 | (2017/2016)-1 | Account name | 2017 | 2016 | (2017/2016)-1 |
| ASSETS | CHH 2017 10-K Report | CHH 2016 10-K Report | Percent change from 2016 to 2017 | ASSETS | MAR 2017 10-K Report | MAR 2016 10-K Report | Percent change from 2016 to 2017 |
| Current assets | Current assets | ||||||
| Cash and cash equivalents | $ 235,336.00 | $ 202,463.00 | 16% | Cash and equivalents | $ 383.00 | $ 858.00 | -55% |
| Receivables | $ 125,452.00 | $ 107,336.00 | 17% | Accounts and notes receivable, net | $ 1,991.00 | $ 1,695.00 | 17% |
| Income taxes receivable | $ - 0 | $ 316.00 | -100% | Prepaid expenses and other | $ 224.00 | $ 230.00 | -3% |
| Notes receivable, net of allowance | $ 13,904.00 | $ 7,873.00 | 77% | Assets held for sale | $ 149.00 | $ 588.00 | -75% |
| Other current assets | $ 28,241.00 | $ 26,885.00 | 5% | Assets, current, total | $ 2,747.00 | $ 3,371.00 | -19% |
| Total current assets | $ 402,933.00 | $ 344,873.00 | 17% | Property and equipment, net | $ 1,793.00 | $ 2,335.00 | -23% |
| Property and equipment, at cost, net | $ 83,374.00 | $ 84,061.00 | -1% | Intangible assets | |||
| Goodwill | $ 80,757.00 | $ 78,905.00 | 2% | Intangible assets | $ 8,805.00 | $ 9,270.00 | -5% |
| Intangible assets, net | $ 14,672.00 | $ 15,738.00 | -7% | Goodwill | $ 9,207.00 | $ 7,598.00 | 21% |
| Notes receivable, net of allowances | $ 147,993.00 | $ 110,608.00 | 34% | Goodwill and intangible assets, net, total | $ 18,012.00 | $ 16,868.00 | 7% |
| Investments, employee benefit plans, at fair value | $ 20,838.00 | $ 16,975.00 | 23% | Equity and cost method investments | $ 740.00 | $ 728.00 | 2% |
| Investments in unconsolidated entities | $ 134,226.00 | $ 94,839.00 | 42% | Notes receivable, net | $ 142.00 | $ 245.00 | -42% |
| Deferred income taxes | $ 13,335.00 | $ 52,812.00 | -75% | Deferred tax assets | $ 93.00 | $ 116.00 | -20% |
| Other assets | $ 29,479.00 | $ 53,657.00 | -45% | Other noncurrent assets | $ 421.00 | $ 477.00 | -12% |
| Total assets | $ 927,607.00 | $ 852,468.00 | 9% | Total assets | $ 23,948.00 | $ 24,140.00 | -1% |
| LIABILITIES AND SHAREHOLDERS EQUITY | CHH 2017 10-K Report | CHH 2016 10-K Report | Percent change from 2016 to 2017 | LIABILITIES AND SHAREHOLDERS EQUITY | MAR 2017 10-K Report | MAR 2016 10-K Report | Percent change from 2016 to 2017 |
| Current liabilities | Current liabilities | ||||||
| Accounts payable | $ 63,540.00 | $ 48,071.00 | 32% | Current portion of long-term debt | $ 398.00 | $ 309.00 | 29% |
| Accrued expenses and other current liabilities | $ 85,838.00 | $ 80,388.00 | 7% | Accounts payable | $ 780.00 | $ 687.00 | 14% |
| Deferred revenue | $ 141,111.00 | $ 133,218.00 | 6% | Accrued payroll and benefits | $ 1,227.00 | $ 1,174.00 | 5% |
| Current portion of long-term debt | $ 1,232.00 | $ 1,195.00 | 3% | Liability for guest loyalty programs | $ 2,064.00 | $ 1,866.00 | 11% |
| Income taxes payable | $ 2,776.00 | $ 796.00 | 249% | Accrued expenses and other | $ 1,541.00 | $ 1,111.00 | 39% |
| Total current liabilities | $ 294,497.00 | $ 263,668.00 | 12% | Liabilities, current, total | $ 6,010.00 | $ 5,147.00 | 17% |
| Long-term debt | $ 725,292.00 | $ 839,409.00 | -14% | Long-term debt | $ 7,840.00 | $ 8,197.00 | -4% |
| Deferred compensation and retirement plan obligations | $ 25,566.00 | $ 21,595.00 | 18% | Liability for guest loyalty programs | $ 2,876.00 | $ 2,675.00 | 8% |
| Income taxes payable | $ 29,041.00 | $ - 0 | Deferred tax liabilities | $ 604.00 | $ 1,020.00 | -41% | |
| Deferred income taxes | $ 39.00 | $ 292.00 | -87% | Other noncurrent liabilities | $ 2,887.00 | $ 1,744.00 | 66% |
| Other liabilities | $ 65,274.00 | $ 38,853.00 | 68% | ||||
| Total liabilities | $ 1,139,709.00 | $ 1,163,817.00 | -2% | Shareholders’ equity | |||
| Class A Common Stock | $ 5.00 | $ 5.00 | 0% | ||||
| Commitments and Contingencies | Additional paid-in-capital | $ 5,770.00 | $ 5,808.00 | -1% | |||
| Common stock | $ 951.00 | $ 951.00 | 0% | Retained earnings | $ 7,391.00 | $ 6,501.00 | 14% |
| Additional paid-in-capital | $ 182,448.00 | $ 159,045.00 | 15% | Treasury stock, at cost | $ (9,418.00) | $ (6,460.00) | 46% |
| Accumulated other comprehensive loss | $ (4,699.00) | $ (8,522.00) | -45% | Accumulated other comprehensive loss | $ (17.00) | $ (497.00) | -97% |
| Treasury stock | $ (1,064,573.00) | $ (1,070,383.00) | -1% | Stockholders' deficit | $ 3,731.00 | $ 5,357.00 | -30% |
| Retained earnings | $ 673,771.00 | $ 607,560.00 | 11% | Liabilities and deficit, total | $ 23,948.00 | $ 24,140.00 | -1% |
| Total shareholders equity | $ (212,102.00) | $ (311,349.00) | -32% | ||||
| Total liabilities and shareholders equity | $ 927,607.00 | $ 852,468.00 | 9% | ||||
Questions: 1. Based on your horizontal analysis of Choice Hotels' and Marriott International's total assets, total liabilities, and total equity, which company is most attractive for an acquisition by the equity firm and why? 2. What advice would you give to the client, Choice Hotels, to reduce its total liabilities?
Answer questions 1 and 2 here. 1.) By conducting a horizontal analysis and looking soley at the companys' total assets, total liabilities, and total equity, the most attractive company to acquire is Choice Hotels. This is because their liabilities are decreasing while their assets are increasing. Also, their shareholders equity is increasing and closer to being in the black. Marriot, on the other hand, has their liabilities increasing and their assets decreasing. 2.) One way to lower their total liabilities would be to work with accountants to understand how to reduce the Transition Tax they pay when bringing foreign income into the United States. If they are unable to reduce it, they can work to defer it to be paid over time instead of at once. Another option would be to apply Cash and Cash Equivalents to some of the liabilities, such as Long Term Debt and Accounts Payable.
https://www.sec.gov/Archives/edgar/data/1046311/000104631118000006/0001046311-18-000006-index.htm https://www.sec.gov/Archives/edgar/data/1046311/000104631117000006/0001046311-17-000006-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828018001756/0001628280-18-001756-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828017001506/0001628280-17-001506-index.htmCash Flow
| CHH 2017 10-K Report | CHH 2016 10-K Report | MAR 2017 10-K Report | MAR 2016 10-K Report | |||||
| 10-K | 10-K | |||||||
| Choice Hotels | 2017 | 2016 | (2017/2016)-1 | Marriott International | 2017 | 2016 | (2017/2016)-1 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | 2017 10-K | 2016 10-K | Percent change from 2016 to 2017 | CASH FLOWS FROM OPERATING ACTIVITIES | 2017 10-K | 2016 10-K | Percent change from 2016 to 2017 | |
| Net income | $ 114,893 | $ 139,371 | -18% | Net income | $ 1,372 | $ 780 | 76% | |
| Adjustments to reconcile net income to net cash provided by operating activities | Adjustments to reconcile to cash provided by operating activities: | |||||||
| Depreciation and amortization | $ 12,431 | $ 11,705 | 6% | Depreciation, amortization, and other | $ 290 | $ 168 | 73% | |
| Loss (gain) on disposal of assets | $ 52 | $ (346) | -115% | Share-based compensation | $ 181 | $ 212 | -15% | |
| Provision for bad debts, net | $ 3,440 | $ 2,151 | 60% | Income taxes | $ 828 | $ 76 | 989% | |
| Non-cash stock compensation and other charges | $ 23,340 | $ 15,458 | 51% | Liability for guest loyalty program | $ 378 | $ 343 | 10% | |
| Non-cash interest and other (income) loss | $ (772) | $ 1,059 | -173% | Merger-related charges | $ (124) | $ 113 | -210% | |
| Deferred income taxes | $ 39,320 | $ (10,542) | -473% | Working capital changes | $ 81 | $ (77) | -205% | |
| Equity in net losses from unconsolidated joint ventures, less distributions received | $ 6,579 | $ 1,025 | 542% | (Gain) loss on asset dispositions | $ (687) | $ 1 | -68800% | |
| Changes in assets and liabilities, net of acquisition | Other | $ 117 | $ 66 | 77% | ||||
| Receivables | $ (23,126) | $ (21,919) | 6% | Net cash provided by operating activities | $ 2,436 | $ 1,682 | 45% | |
| Advances to/from marketing and reservation system activities, net | $ 51,722 | $ (21,449) | -341% | |||||
| Forgivable notes receivable, net | $ (30,638) | $ (17,410) | 76% | INVESTING ACTIVITIES | ||||
| Accounts payable | $ 12,455 | $ (13,689) | -191% | Acquisition of a business, net of cash acquired | $ - 0 | $ (2,412) | -100% | |
| Accrued expenses and other current liabilities | $ 7,176 | $ 5,225 | 37% | Capital expenditures | $ (240) | $ (199) | 21% | |
| Income taxes payable/receivable | $ 31,383 | $ 5,775 | 443% | Dispositions | $ 1,418 | $ 218 | 550% | |
| Deferred revenue | $ 7,797 | $ 61,646 | -87% | Loan advances | $ (93) | $ (32) | 191% | |
| Other assets | $ 1,521 | $ (8,703) | -117% | Loan collections | $ 187 | $ 67 | 179% | |
| Other liabilities | $ (199) | $ 2,678 | -107% | Contract acquisition costs | $ (189) | $ (80) | 136% | |
| Net cash provided by operating activities | $ 257,374 | $ 152,035 | 69% | Redemption of debt security | $ - 0 | $ - 0 | ||
| Other | $ (63) | $ 29 | -317% | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | Net cash provided by (used in) investing activities | $ 1,020 | $ (2,409) | -142% | ||||
| Investment in property and equipment | $ (23,437) | $ (25,191) | -7% | |||||
| Investment in intangible assets | $ (2,517) | $ (2,580) | -2% | FINANCING ACTIVITIES | ||||
| Proceeds from sales of assets | $ 1,000 | $ 11,462 | -91% | Commercial paper/Credit Facility, net | $ 25 | $ 1,365 | -98% | |
| Acquisitions of real estate | $ - 0 | $ (28,583) | -100% | Issuance of long-term debt | $ - 0 | $ 1,482 | -100% | |
| Business acquisition, net of cash acquired | $ - 0 | $ (1,341) | -100% | Repayment of long-term debt | $ (310) | $ (326) | -5% | |
| Contributions to equity method investments | $ (50,554) | $ (34,661) | 46% | Issuance of Class A Common Stock | $ 6 | $ 34 | -82% | |
| Distributions from equity method investments | $ 4,569 | $ 3,700 | 23% | Dividends paid | $ (482) | $ (374) | 29% | |
| Purchases of investments, employee benefit plans | $ (2,447) | $ (1,661) | 47% | Purchase of treasury stock | $ (3,013) | $ (568) | 430% | |
| Proceeds from sales of investments, employee benefit plans | $ 2,245 | $ 1,911 | 17% | Share-based compensation withholding taxes | $ (157) | $ (100) | 57% | |
| Issuance of mezzanine and other notes receivable | $ (19,738) | $ (32,604) | -39% | Other | $ - 0 | $ (24) | -100% | |
| Collections of mezzanine and other notes receivable | $ 655 | $ 11,070 | -94% | Net cash (used in) provided by financing activities | $ (3,931) | $ 1,489 | -364% | |
| Other items, net | $ 109 | $ 11 | 891% | (DECREASE) INCREASE IN CASH AND EQUIVALENTS | $ (475) | $ 762 | -162% | |
| Net cash used by investing activities | $ (90,115) | $ (98,467) | -8% | CASH AND EQUIVALENTS, beginning of period | $ 858 | $ 96 | 794% | |
| CASH AND EQUIVALENTS, end of period | $ 383 | $ 858 | -55% | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from the issuance of long-term debt | $ - 0 | $ - 0 | ||||||
| Net (repayments) borrowings pursuant to revolving credit facilities | $ (115,003) | $ 25,795 | -546% | |||||
| Principal payments on long-term debt | $ (660) | $ (988) | -33% | |||||
| Proceeds from other debt agreements | $ - 0 | $ 550 | -100% | OCF Ratio | CCH | Marriot | ||
| Debt issuance costs | $ - 0 | $ (284) | -100% | 2017 | 2016 | 2017 | 2016 | |
| Purchases of treasury stock | $ (9,807) | $ (35,926) | -73% | Cash Flow from Ops | $ 257,374 | $ 152,035 | $ 2,436 | $ 1,682 |
| Dividends paid | $ (48,651) | $ (46,182) | 5% | Current Liabilities | $ 294,497.00 | $ 263,668.00 | $ 6,010.00 | $ 5,147.00 |
| Proceeds from transfer of interest in notes receivable | $ 24,237 | $ - 0 | Operating Cash Flow | 0.8739443865 | 0.5766152889 | 0.4053244592 | 0.3267923062 | |
| Proceeds from exercise of stock options | $ 14,107 | $ 12,951 | 9% | |||||
| Net cash used by financing activities | $ (135,777) | $ (44,084) | 208% | |||||
| Net change in cash and cash equivalents | $ 31,482 | $ 9,484 | 232% | |||||
| Effect of foreign exchange rate changes on cash and cash equivalents | $ 1,391 | $ (462) | -401% | |||||
| Cash and cash equivalents at beginning of period | $ 202,463 | $ 193,441 | 5% | |||||
| Cash and cash equivalents at end of period | $ 235,336 | $ 202,463 | 16% |
Questions: 1. Based on your horizontal analysis of Choice Hotels' and Marriott International's operating, investing, and financing activities, which company is most attractive for an acquisition by the equity firm and why? 2. What advice would you give to the client, Choice Hotels, to improve their investing and financing activities?
Answer questions 1 and 2 here. 1.) Both companies have high quality earnings, where their operating activitities are higher than their net incomes. But, Choice Hotels is investing heavily in their company buy purchasing more real estate. Additionally, by conducting a horizontal analysis and looking at their Operating Cash Flow Ratios, Choice Hotels has more Cash Flow from Operations and is almost bringing in $1 from operations for every $1 of current liabilities. It is clear to see that Choice Hotels is looking to grow and has good financials. Choice Hotels is clearly the most attractive company to acquire. 2.) For Choice Hotels, to improve financing activities they should look into issuing shares of stock to raise some money for their financing activities section. Choice Hotels can also negotiate different terms with lenders in terms of paying down debt to reduce long-term debt expense. Another way to increasing financing activities would be to reduce the amount of dividends paid out each year. And to improve investing activities, Choice Hotels can recognize more shares of the investee's net loss to reduce their equity method investment.
https://www.sec.gov/Archives/edgar/data/1046311/000104631118000006/0001046311-18-000006-index.htm https://www.sec.gov/Archives/edgar/data/1046311/000104631117000006/0001046311-17-000006-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828018001756/0001628280-18-001756-index.htm https://www.sec.gov/Archives/edgar/data/1048286/000162828017001506/0001628280-17-001506-index.htmCost and Investing
| Choice Hotels Sales, Production, and Cost Information | Overhead Costs | ||||||||||
| Room Type | Standard Guest Room | Junior Suite | Presidential Suite | Type | Cost | ||||||
| Volume | 150 | 110 | 25 | Depreciation | $3,200,000 | ||||||
| Price | $140,000 | $240,000 | $1,050,000 | Maintenance | $1,800,000 | ||||||
| Unit costs | Purchasing | $320,000 | |||||||||
| Direct materials | $30,000 | $92,000 | $310,000 | Inspection | $850,000 | ||||||
| Direct labor | $54,000 | $85,000 | $640,000 | Indirect materials | $490,000 | ||||||
| Manufacturing | $30,000 | $30,000 | $30,000 | Supervision | $1,700,000 | ||||||
| overhead | Supplies | $190,000 | |||||||||
| Total unit cost | $114,000 | $207,000 | $980,000 | Total manufacturing overhead cost | $8,550,000 | ||||||
| Unit gross profit | $26,000 | $33,000 | $70,000 | Note: Manufacturing overhead costs are fixed. They do not vary with the volume of manufacturing activity. | |||||||
| Direct labor hours | 1,200 | 1,300 | 5,940 | ||||||||
| Rate per hour | $45.00 | $65.38 | $107.74 | ||||||||
| Answer Questions 1 and 2 Below: | |||||||||||
| Column1 | labor hours | units | total labor hours | total overhead (MOH*RPH) | ROOMS | MoH per unit | %of overhead (TO/MoH) | ||||
| standard | 1200 | 150 | 180,000.00 | $ 3,264,050.90 | 150 | $ 57,000.00 | 57.2640509014 | ||||
| junior | 1300 | 110 | 143,000.00 | $ 2,593,107.10 | 110 | $ 77,727.27 | 33.361611877 | ||||
| presidential | 5940 | 25 | 148,500.00 | $ 2,692,841.99 | 25 | $ 342,000.00 | 7.8738069989 | ||||
| $ 471,500.00 | $ 8,550,000.00 | ||||||||||
| MoH | $ 8,550,000.00 | Total Manufact. Overhead | |||||||||
| Rate per hour (MoH/TotalLH | 18.1336161188 | $ 471,500.00 | |||||||||
| 3 | |||||||||||
| Choice Hotels’ controller developed the following data for use in activity-based costing: Complete the calculations to help you answer the questions below. | |||||||||||
| Manufacturing overhead | Amount | Cost driver | Standard Guest Room | Junior Suite | Presidential Suite | Sum of Cost Drivers | Cost per cost driver | Cost per Standard Guest room | Cost per Junior Suite | Cost per Presidential Suite | Check |
| Depreciation | $3,200,000 | Square feet | 50,000 | 30,000 | 30,000 | 110,000 | $ 29.09 | $ 1,454,545 | $ 872,727 | $ 872,727 | $ 3,200,000 |
| Maintenance | $1,800,000 | Direct labor hours | 180,000 | 143,000 | 148,500 | 471,500 | $ 3.82 | $ 687,169 | $ 545,917 | $ 566,914 | $ 1,800,000 |
| Purchasing | $320,000 | # of purchase orders | 2,500 | 1,500 | 9,000 | 13,000 | $ 24.62 | $ 61,538 | $ 36,923 | $ 221,538 | $ 320,000 |
| Inspection | $850,000 | # of inspections | 1,000 | 850 | 3,500 | 5,350 | $ 158.88 | $ 158,879 | $ 135,047 | $ 556,075 | $ 850,000 |
| Indirect | $490,000 | Units manufactured | 150 | 110 | 25 | 285 | $ 1,719.30 | $ 257,895 | $ 189,123 | $ 42,982 | $ 490,000 |
| materials | |||||||||||
| Supervision | $1,700,000 | # of inspections | 1,000 | 850 | 3,500 | 5,350 | $ 317.76 | $ 317,757 | $ 270,093 | $ 1,112,150 | $ 1,700,000 |
| Supplies | $190,000 | Units manufactured | 150 | 110 | 25 | 285 | $ 666.67 | $ 100,000 | $ 73,333 | $ 16,667 | $ 190,000 |
| Total | $8,550,000 | 234,800 | 176,420 | 194,550 | 605,770 | $ 2,920.12 | $ 3,037,783 | $ 2,123,164 | $ 3,389,053 | $ 8,550,000.00 | |
Questions: 1. What would be the cost per unit of producing Guest Room Set A using factory space as the allocation basis? What would be the cost per unit using labor as the allocation basis? 2. What would be the cost per unit of producing Guest Room Set A using activity-based costing? 3. Should Choice Hotels build Guest Room Set A or Guest Room Set B? Why? 4. Should Choice Hotels build or purchase the guest room furniture? Why?
Choice Hotels produces three models of guest rooms: the standard guest room, Junior Suite, and Presidential Suite. The Standard Guest Room comes with basic furniture, bathroom plan, and amenities. It sells for $140,000 to franchise hotels. The Junior Suite model is larger and includes an enhanced furniture selection, upgraded bathroom fixtures, more comfortable bedding. The guest room is considered an upgrade from the standard guestroom model. The Junior Suite sells for $240,000 to franchise hotels. The Presidential Suite model is a custom-made guest room with floors and walls constructed from specialty wood. The drapes are made from the traditional flax-based canvass. It has the look and feel of a room in the White House, with modern comforts and security. The Presidential Suite sells for $1,050,000 to franchise hotels. Workers who build the Presidential Suite are specialized craftsmen. They earn twice the hourly rate of those working on the Standard Guest Room and Junior Suite models. The labor rate is fully burdened to include benefits. Most of Choice Hotels’ guest room sales come from the Standard Guest Room and the Junior Suite, but sales of the Presidential Suite model have been growing. The company's sales, production, and cost information for last year is provided to the right.
Answer Questions 1 and 2 1. Choice Hotels allocated 30,000 of overhead to each of the three models last year. This might not be an accurate way to assign overhead costs to products because not all three models carry the same amount of room volume. The Presidential Suite only utilizes about ten percent of overhead, meaning that style of room needs less manufacturing overhead than the other two suites. Standard Guest Room (30,000*150)=4,5000,000 Junior Suit (30,000*110)=3,300,000 Presidential Suit (30,000*25)=750,000 2. See Table below.
Answer Questions 3 and 4 here. Standard Room Junior Suite Presidential Suite depreciation @ $3,200,000 (50,000/110,000)*3,200,000 = 1,454,545.45 (30,000/110,000)*3,200,000 = 872,727.27 (30,000/110,000)*3,200,000 =$872,727.27 maintenance (180,000/471,500)*1,800,000 = 687,169 (143,000/471,500)*1,800,000 = 545,591.28 (471,050/471,500)*1,800,00=179,828.21 Purchasing (2500/13000)*32000 = 61,538 (1500/13000)*32000 = 3,692.31 (9000/13000)*32000=22,153.85 inspection (1000/5350)*85000 = 15,887.85 (850/5350)*85000 = 13,504.67 (850/5350)*85000=13,504.67 indirect materials (150/285)*490,000 = 257,894.74 (110/285)*490,000 = 189,122.80 (25/285)*490,000=42,982.46 supervision (1000/5350)*1,700,000 = 317,757.00 (850/5350)*1,700,000 = 270,093.46 (3500/5350)*1,700,000=1,112,149.53 supplies (150/666.7)*190,000 = 42,747.86 (110/666.7)*190,000 = 31,348.43 (285/666.7)*190,000=81,220.94 Totals: $3,037,782.78 $2,123,163.96 $3,389,053.26 totals per unit ($3,037,782.78/150=20251.8852 ($2,123,163.96/110 =1930.15 ($3,389,053.26/25=135,562.13 Question:4 Direct Material = 310,000 Direct Labor = 640,000 Manufacturing Overheads @3,389.05/25= 135562.12 total costs = $1,085,562 Questions 5-10 below: 5. The company is not meeting the true cost at the current price. It's selling lower at the price of $35,562.00. 6. What price should Choice Hotels charge for the Presidential Suite? Correction: Selling Price =1050000 Direct Labor=640000 Direct Materials=310000 Gross Profit= 100,000 Gross Profit Margin= 100,000/1050000 (0.095) Net Profit Margin= 1.00-0.095=0.905 New Sales Price= 100,000/0.905= 110,497.24 7. Assume that the Presidential Suite has the same profit margin as the standard guest room. What should its selling price be? Show all calculations. Selling Price=140000 Direct Labor=54000 Direct Materials=30000 Gross Profit=56,000 Gross Profit Margin= 56,000/140000 (0.4) Net Profit Margin= 1.00-0.4=0.6 New Sales Price= 56,000/0.6= 93,333.33 8. What should Choice Hotels do if the quantity of the Presidential Suite Guest Rooms sold at the new price falls to 10 per year? With the new selling price dropping to $93,333.33 and the quantity of Presidential Suite Guest Rooms falling to 10 per year, for a total of $933,333.33, it would be in Choice Hotels' best interest to find ways to decrease it's variable costs. This is necessary because, since the activity of the business has decreased, the variable costs must decrease as well so that certain overhead costs aren't continuing to unnecessarily drive down the revenue. 9. What should Choice Hotels do if the price of the Presidential Suite cannot exceed $1,050,000? If the sales price cannot exceed $1,050,000, the company should consider reevaluating the areas of cost in which they can lower. Maybe they can lower the cost of direct materials or consolidate other variable costs. 10. At a selling price of $1,050,000 each, what is the breakeven unit volume for the Presidential Suite? MOH=30,000 Contribution margin per unit (1,050,000– 950,000)=100,000 Breakeven = Fixed Cost / Unit Contribution 30,000+221,580+567,270= 818,850 818,850/100,000=8.19 BE volume in units is 8 units sold
Choice Hotels has contracted with a mid-size furniture manufacturer for the production of guestroom furniture for three models of guest rooms: the standard guest room, Junior Suite, and Presidential Suite. The Standard Guest Room comes with basic furniture, bathroom plan, and amenities. It sells for $140,000 to franchise hotels. The Junior Suite model is larger and includes an enhanced furniture selection, upgraded bathroom fixtures, more comfortable bedding. The guest room is considered an upgrade from the standard guestroom model. The Junior Suite sells for $240,000 to franchise hotels. The Presidential Suite model is a custom-made guest room with floors and walls constructed from specialty wood. The drapes are made from the traditional flax-based canvass. It has the look and feel of a room in the White House, with modern comforts and security. The Presidential Suite sells for $1,050,000 to franchise hotels. Workers who build the Presidential Suite are specialized craftsmen. They earn twice the hourly rate of those working on the Standard Guest Room and Junior Suite models. The labor rate is fully burdened to include benefits. Most of Choice Hotels’ guest room sales come from the Standard Guest Room and the Junior Suite, but sales of the Presidential Suite model have been growing. The company's sales, production, and cost information for last year is provided to the right.
Questions: 3. Use activity-based costing to allocate the costs of overhead per unit and in total to each guest room type. Show all supporting calculations in the space provided to the right. 4. Calculate the cost of one Presidential Suite using activity-based costing. 5. At the current selling price, is the company covering its true cost of production of the Presidential Suite? Briefly discuss. 6. What price should Choice Hotels charge for the Presidential Suite? 7. Assume that the Presidential Suite has the same profit margin as the standard guest room. What should its selling price be? Show all calculations. 8. What should Choice Hotels do if the quantity of the Presidential Suite Guest Rooms sold at the new price falls to 10 per year? 9. What should Choice Hotels do if the price of the Presidential Suite cannot exceed $1,050,000? 10. At a selling price of $1,050,000 each, what is the breakeven unit volume for the Presidential Suite?
Questions: 1. The cost-allocation system Choice Hotels has been using allocates over 90 percent of overhead costs to the Standard Guest Room and the Junior Suite, because over 90 percent of the models produced were one of these two models. How much overhead was allocated to each of the three models last year? Discuss why this might not be an accurate way to assign overhead costs to products. 2. Choice Hotels' production manager proposes allocating overhead by direct labor hours instead, since the different models require different amounts of labor. How much overhead would be allocated to each guest room (per unit and in total) using this method? Show all supporting calculations.
Profitability
| Choice Hotels | Marriott International | (2017/2016)-1 | (2017/2016)-1 | |||
| Ratios | 2017 | 2016 | 2017 | 2016 | Percent Change from 2016 to 2017 | Percent Change from 2016 to 2017 |
| Return on equity (ROE) = net income / total equity | -$0.54 | -$0.45 | $0.37 | $0.15 | 21.01072555852200% | 152.55496223601300% |
| Return on assets (ROA) = net income / total assets | $0.12 | $0.16 | $0.06 | $0.03 | -24.24082764287340% | 77.30767089377410% |
Questions: 1. The return on assets ratio tells us the profit generated by each dollar in assets. You will want to compare this ratio to Choice Hotels' historical performance and to Marriott International to understand if it is an acceptable ratio. Is the return on assets ratio acceptable? Why or why not? 2. Which of the above ratios would you use to determine which company, Choice Hotels or Marriott International, is more attractive for an acquisition? Why? 3. Based on the financial statement analysis, earnings per share analysis, budgeting ratios, and the above profitability ratios, which company would you invest in and why?
Answer Questions 1 to 3 here. 1.The ROA of choice Hotels is more than double that of Marriott, meaning that Choice is more profitable as each asset is generating more returns per each as held than its competitor. This is good for a buyer because if the ROA is more than doubled for Choice Hotels this lets investors know the performance of the company. Choice Hotel is steadily earning a profit which is what the investors want to see. 2. The ROA is more reliable when making a acquisition choice as it informs how the company is profitable relative to the assets it holds. 3. I would invest in Choice as it has higher returns on the equity and has shown an improvement in the tow years under review choice also has higher liquidity ratios, has seen better improvement in the financial position , cash flows and has higher revenues than Marriott's .
Budgeting
| Choice Hotels | Marriott International | (2017/2016)-1 | (2017/2016)-1 | |||
| Ratios | 2017 | 2016 | 2017 | 2016 | Percent Change from 2016 to 2017 | Percent Change from 2016 to 2017 |
| Quick ratio = (cash + cash equivalence + receivables) / current liabilities | $1.27 | $1.21 | $0.40 | $0.50 | 5% | -20% |
| Acid test ratio = current assets / current liabilities | 1.368207486 | 1.3079820077 | 1.2124792013 | 1.7635515834 | 5% | -31% |
| Debt ratio = total liabilities / total assets | 1.2286550231 | 1.3652324779 | 0.8442041089 | 0.778086164 | -10% | 8% |
| CHH 17 | 2016 | Marriot 17 | 2016 | |||
| Cash and Cash Equivalent | 235336 | 202463 | 383 | 858 | ||
| Receivables | 125452 | 316 | 1991 | 1695 | ||
| Receivables | 13904 | 7873 | ||||
| Receivables | 107336 | |||||
| Current Assets | 402933 | 344873 | 7287 | 9077 | ||
| Total Assets | 927607 | 852468 | 23948 | 24140 | ||
| Current Liabilities | 294497 | 263668 | 6010 | 5147 | ||
| Total Liabilities | 1139709 | 1163817 | 20217 | 18783 |
Questions: 1. Quick ratios between 0.5 and 1 are considered satisfactory as long as the collection of receivables is not expected to slow. Does the client, Choice Hotels, have enough current assets to meet the payment schedule of current liabilities with a margin of safety? 2. Which of the above ratios would you use to determine which company, Choice Hotels or Marriott International, is more attractive for an acquisition by the equity firm and why?
Answer Questions 1 to 3 here. 1. Choice Hotel's short term liquidity position is above satisfactory. Their receiables have grown year over year and haven't shown an signs of slowing down. Marriot International's quick ratio, on the other hand, is below satisfactory. They do not have any many receivables accounts and their cash has gone down while their liabilities has increased. Choice Hotels, the client, does have enough current assets to pay back all of their current liabilities, by just using their current assets, and will still have assets left over. They are well within their margin of safety. 2. In terms of looking for an attractive company for an acquisition, it would depend on why I want the company to decide on which raio is the most important. Quick Ratio would be the most important. This ratio shows that they have enough liquid assets to cover any expenses we may face within the first few months of purchase. This will give us a safety net when acquiring the company. This ratio also tells us that if we do not want to keep the compan, we can quickly liquidate it and still make money on the deal.
