Project 3: Analyzing Financial Reports Step 5 and 6
Romeo1985
Team1_project3_workbook.xlsxInstructions
Choice Hotels 10-K In Project 3, you will learn how to access US Securities and Exchange Commission public information about companies. You will also learn how to calculate and analyze ratios, analyze and make decisions based on cost, and develop a sales forecast and budget. Start by looking up the 10-K for Choice Hotels (CHH) for year 2018 on the SEC website. Follow these steps: 1. Go to www.SEC.gov. 2. At the top on the right, click Company Filings. 3. In the fast search box, enter the Ticker Symbol for Choice Hotels, CHH. 4. Click Search 5. EDGAR search results will appear. Notice the name and address for Choice Hotels. Also notice the box that reads Filter Results: Filing Type. Enter "10-K" and click Search. 6. You should see a 10-K with a filing date of 2019-02-26. This is the latest available at the time this project was developed. 7. Repeat 1 through 6 for Marriott International (MAR) for year 2018 on the SEC website. You should see a 10-K with a filing date of 2019-03-01. This is the latest available at the time this project was developed. 8. There are two available formats of this 10-K data, and we will use the Documents to answer the questions. You will use the data provided in the worksheets to complete the Ratio Analysis and to answer related questions. 9. Complete the financial statements by filling in the Excel formulas for each grey box. 10. Answer all questions on each tab in this workbook. Note: Quarterly Financial Statements are not audited. Only annual financial statements are audited by a public accounting firm.
Choice Hotels 10-K In Project 3, you will learn how to access US Securities and Exchange Commission public information about companies. You will also learn how to calculate and analyze ratios, analyze and make decisions based on cost, and develop a sales forecast and budget. Start by looking up the 10-K for Choice Hotels (CHH) for year 2019 on the SEC website. Follow these steps: 1. Go to www.SEC.gov. 2. At the top on the right, click Company Filings. 3. In the fast search box, enter the Ticker Symbol for Choice Hotels, CHH. 4. Click Search 5. EDGAR search results will appear. Notice the name and address for Choice Hotels. Also notice the box that reads Filter Results: Filing Type. Enter "10-K" and click Search. 6. You should see a 10-K with a filing date of 2020-03-02. This is the latest available at the time this project was developed. 7. Repeat 1 through 6 for Marriott International (MAR) for year 2019 on the SEC website. You should see a 10-K with a filing date of 2020-02-27. This is the latest available at the time this project was developed. 8. There are two available formats of this 10-K data, and we will use the Documents to answer the questions. You will use the data provided in the worksheets to complete the Ratio Analysis and to answer related questions. 9. Complete the financial statements by filling in the Excel formulas for each grey box. 10. Answer all questions on each tab in this workbook. Note: Quarterly Financial Statements are not audited. Only annual financial statements are audited by a public accounting firm.
Income Statement
| Common Size Income Statements | 12 Months Ended | Consolidated Statements of Income - USD ($) ($ in millions, except per share amounts) | 12 Months Ended | ||||||||||
| Consolidated Statements of Income - USD ($) | Dec. 31, 2019 | % of Total revenues | Dec. 31, 2018 | % of Total revenues | Dec. 31, 2017 | % of Total revenues | Dec. 31, 2019 | % of Total revenues | Dec. 31, 2018 | % of Total revenues | Dec. 31, 2017 | % of Total revenues | |
| REVENUES: | REVENUES | ||||||||||||
| Royalty fees | $388,151,000 | 34.82% | $ 376,676,000 | 36.17% | $ 341,745,000 | 36.31% | Base management fees | $ 1,180 | 5.63% | $ 1,140 | 5.49% | $ 1,102 | 5.39% |
| Initial franchise and relicensing fees | $27,489,000 | 2.47% | $ 26,072,000 | 2.50% | $ 23,038,000 | 2.45% | Franchise fees | $ 2,006 | 9.57% | $ 1,849 | 8.91% | $ 1,586 | 7.75% |
| Procurement services | $61,429,000 | 5.51% | $ 52,088,000 | 5.00% | $ 40,451,000 | 4.30% | Incentive management fees | $ 637 | 3.04% | $ 649 | 3.13% | $ 607 | 2.97% |
| Marketing and reservation system | $577,426,000 | 51.80% | $ 543,677,000 | 52.21% | $ 499,625,000 | 53.08% | Gross fee revenues | $ 3,823 | 18.23% | $ 3,638 | 17.53% | $ 3,295 | 16.11% |
| Owned Hotels | $20,282,000 | 1.82% | $ - 0 | 0.00% | $ - 0 | 0.00% | Contract investment amortization | $ (62) | -0.30% | $ (58) | -0.28% | $ (50) | -0.24% |
| Other | $40,043,000 | 3.59% | $ 42,791,000 | 4.11% | $ 36,438,000 | 3.87% | Net fee revenues | $ 3,761 | 17.93% | $ 3,580 | 17.25% | $ 3,245 | 15.87% |
| Total revenues | $1,114,820,000 | 100.00% | $ 1,041,304,000 | 100.00% | $ 941,297,000 | 100.00% | Owned, leased, and other revenue | $ 1,612 | 7.69% | $ 1,635 | 7.88% | $ 1,752 | 8.57% |
| OPERATING EXPENSES: | Cost reimbursement revenue | $ 15,599 | 74.38% | $ 15,543 | 74.88% | $ 15,455 | 75.57% | ||||||
| Selling, general and administrative | $168,833,000 | 15.14% | $ 170,027,000 | 16.33% | $ 165,821,000 | 17.62% | Total revenues | $ 20,972 | 100.00% | $ 20,758 | 100.00% | $ 20,452 | 100.00% |
| Depreciation and amortization | $18,828,000 | 1.69% | $ 14,330,000 | 1.38% | $ 6,680,000 | 0.71% | OPERATING COSTS AND EXPENSES | ||||||
| Marketing and reservation system | $579,139,000 | 51.95% | $ 534,266,000 | 51.31% | $ 479,400,000 | 50.93% | Owned, leased, and other-direct | $ - 0 | 0.00% | $ 1,306 | 6.29% | $ 1,411 | 6.90% |
| Owned Hotels | $14,448,000 | 1.30% | $ - 0 | 0.00% | $ - 0 | 0.00% | Depreciation, amortization, and other | $ 341 | 1.63% | $ 226 | 1.09% | $ 229 | 1.12% |
| Total operating expenses | $781,248,000 | 70.08% | $ 718,623,000 | 69.01% | $ 651,901,000 | 69.26% | General, administrative, and other | $ 938 | 4.47% | $ 927 | 4.47% | $ 921 | 4.50% |
| Impairment of goodwill | -$3,097,000 | -0.28% | $ (4,289,000) | -0.41% | $ - 0 | 0.00% | Merger-related costs and charges | $ 138 | 0.66% | $ 155 | 0.75% | $ 159 | 4.50% |
| Gain on sale of assets, net | $100,000 | 0.01% | $ 82,000 | 0.01% | $ 257,000 | 0.03% | Reimbursed expenses | $ - 0 | 0.00% | $ 15,778 | 76.01% | $ 15,228 | 74.46% |
| Operating income | $318,642,000 | 28.58% | $ 318,474,000 | 30.58% | $ 289,653,000 | 30.77% | Total operating expenses | $ 19,172 | 91.42% | $ 18,392 | 88.60% | $ 17,948 | 87.76% |
| OTHER INCOME AND EXPENSES, NET: | OPERATING INCOME | $ 1,800 | 8.58% | $ 2,366 | 11.40% | $ 2,504 | 12.24% | ||||||
| Interest expense | $46,807,000 | 4.20% | $ 45,908,000 | 4.41% | $ 45,039,000 | 4.78% | Gains and other income, net | $ 154 | 0.73% | $ 194 | 0.93% | $ 688 | 3.36% |
| Interest income | -$9,996,000 | -0.90% | $ (7,452,000) | -0.72% | $ (5,920,000) | -0.63% | Interest expense | $ (394) | -1.88% | $ (340) | -1.64% | $ (288) | -1.41% |
| Loss on extinguishment of debt | $7,188,000 | 0.64% | $ - 0 | 0.00% | $ - 0 | 0.00% | Interest income | $ 26 | 0.12% | $ 22 | 0.11% | $ 38 | 0.19% |
| Other (gain) loss | -$4,862,000 | -0.44% | $ 1,437,000 | 0.14% | $ (3,229,000) | -0.34% | Equity in earnings | $ 13 | 0.06% | $ 103 | 0.50% | $ 40 | 0.20% |
| Equity in net (income) loss of affiliates | $9,576,000 | 0.86% | $ 5,323,000 | 0.51% | $ 4,546,000 | 0.48% | INCOME BEFORE INCOME TAXES | $ 1,599 | 7.62% | $ 2,345 | 11.30% | $ 2,982 | 14.58% |
| Total other income and expenses, net | $48,713,000 | 4.37% | $ 45,216,000 | 4.34% | $ 40,436,000 | 4.30% | Provision for income taxes | $ (326) | -1.55% | $ (438) | -2.11% | $ (1,523) | -7.45% |
| Income before income taxes | $269,929,000 | 24.21% | $ 273,258,000 | 26.24% | $ 249,217,000 | 26.48% | NET INCOME | $ 1,273 | 6.07% | $ 1,907 | 9.19% | $ 1,459 | 7.13% |
| Income taxes | $47,051,000 | 4.22% | $ 56,903,000 | 5.46% | $ 126,890,000 | 13.48% | EARNINGS PER SHARE | ||||||
| Net income | $222,878,000 | 19.99% | $ 216,355,000 | 20.78% | $ 122,327,000 | 13.00% | Earnings per share - basic | $ 3.83 | 0.02% | $ 5.45 | 0.03% | $ 3.89 | 0.02% |
| Basic earnings per share: | Earnings per share - diluted | $ 3.80 | 0.02% | $ 5.38 | 0.03% | $ 3.84 | 0.02% | ||||||
| Basic earnings per share (in dollars per share) | $4.00 | 0.00000035880% | $ 3.83 | 0.00000036781% | $ 2.16 | 0.00000022947% | |||||||
| Diluted earnings per share (in dollars per share) | $3.98 | 0.00000035701% | $ 3.80 | 0.00000036493% | $ 2.15 | 0.00000022841% | |||||||
| Questions: | |||||||||||||
| 1. What are two accounts in the Choice Hotels income statement that show the biggest change over the past 3 years? What information in the 10-K report helps to explain these changes? | |||||||||||||
| 2. What are two accounts in the Marriott income statement that show the biggest change over the past 3 years? What information in the 10-K report helps to explain these changes? | |||||||||||||
| 3. Which of the two companies has the financially stronger income statement? Explain your rationale thoroughly. | |||||||||||||
The two accounts in the Choice Hotel's income statement that show the biggest change over the past 3 years are Owned Hotel and Royalty Fees. Choice Hotel acquired four Cambria operating hotels in the third quarter of 2019 and a fifth Cambria hotel also opened in 2019 which was previously under construction. The acquired Hotels are listed as Owned Hotels on the Company's income statement showing $0 in 2017 and 2018, and 20,282 in 2019. Royalty Fees increased from $341,745,000 in 2017 to $376,676 in 2018, with a further increase to $388,151,000 in 2019. Domestic royalty fees has increased from $354.7 million for the year ended December 31, 2018 to $366.6 million for the year ended December 31, 2019 reflecting a 3% increase. The increased figure represents a 2.9% increase domestic franchised hotel rooms and increase in effective royalty rates. The Company's effective royalty rate for the domestic hotel system increased from 4.75% for the year ended December 31, 2018 to 4.86% for the year ended December 31, 2019. In addition, $1.5 million was added to the account as a result of the inclusion of an additional month of WoodSpring revenue in operations based on the Company's acquisition date of February 1, 2018.
The two accounts that show the biggest change in Marriott Hotel's income statement are Net Income and Gain and Other Income. Marriott Hotel saw a decrease in net income between 2018-2019 when the account decrease from $1,907,000 to $1,273,000. This stems from a major increase in operating expenses and a decrease in revenue, mostly between 2018-2019. In 2017 Gains and other income, net decreased by $494 million, this is as a result of gain on the disposition of the company’s ownership interest in Avendra, net of a 2018 true-up $653 million and the 2017 gain on the sale of the Charlotte Marriott City Center $24 million. This was partially offset by 2018 gains on property sales of $132 million and sales of interest in four equity method investments totaling $46 million. The Gains and other income, net account also decreased by $40 million in 2018 primarily because of the gains on property sales of $132 million and the gains on the sales of interest in four equity method investments totaling $46 million which was partially offset by the 2019 gains on property sales $134 million. .
To assess a company’s financial soundness using its income statement one needs to look at the company’s profitability. The profitability is measured by taking away the expenses of the company from the revenue generated. From examining the income statements of both Choice Hotel and Marriott Hotel the net profit for Choice Hotel indicates that it is a financially stronger company than Marriott Hotel. Net profit for Choice Hotel shows that it represented 20% in 2019, 21% in 2018 and 13% in 2017 of total revenue. Also, this reveals a $6,523 change from 2018 to 2019, representing a 3.02% change over the same period from 2018 to 2019, and $94,028 change from 2017 to 2018, representing a 76.87% over the same period from 2017 to 2018. On the other hand Marriott Hotel the Net Profit represented 6% in 2019, 9% in 2018 and 7% in 2017 of total revenue. The company had a ($634) change from 2018 to 2019, representing a (33%) over the same period from 2018 to 2019 and, $448 change from 2017 to 2018, representing a 30.7% change over the same period from 2017 to 2018.
Balance Sheet
| Common Size Balance Sheets | 12 Months Ended | Common Size Balance Sheets | 12 Months Ended | ||||||
| Consolidated Balance Sheets - USD ($) $ in Thousands | Dec. 31, 2019 | % of Total assets | Dec. 31, 2018 | % of Total assets | Consolidated Balance Sheets - USD ($) $ in Millions | Dec. 31, 2019 | % of Total assets | Dec. 31, 2018 | % of Total assets |
| Current assets | Current assets | ||||||||
| Cash and cash equivalents | $33,766 | 2.44% | $ 26,642 | 2.34% | Cash and equivalents | $ 225 | 0.90% | $ 316 | 1.33% |
| Receivables (net of allowance for doubtful accounts of $18,482 and $15,905, respectively) | $141,566 | 10.21% | $ 138,018 | 12.12% | Accounts and notes receivable, net | $ 2,395 | 9.56% | $ 2,133 | 9.00% |
| Income taxes receivable | $11,126 | 0.80% | $ 10,122 | 0.89% | Prepaid expenses and other | $ 252 | 1.01% | $ 249 | 1.05% |
| Notes receivable, net of allowances | $25,404 | 1.83% | $ 36,759 | 3.23% | Assets held for sale | $ 255 | 1.02% | $ 8 | 0.03% |
| Other current assets | $24,727 | 1.78% | $ 32,243 | 2.83% | Total current assets | $ 3,127 | 12.48% | $ 2,706 | 11.42% |
| Total current assets | $236,589 | 17.06% | $ 243,784 | 21.42% | Property and equipment, net | $ 1,904 | 7.60% | $ 1,956 | 8.25% |
| Property and equipment, at cost, net | $351,502 | 25.35% | $ 127,535 | 11.20% | |||||
| Operating lease right-of-use assets | $24,088 | 1.74% | $ - 0 | 0.00% | Brands | $ 5,954 | 23.77% | $ 5,790 | 24.43% |
| Goodwill | $159,196 | 11.48% | $ 168,996 | 14.85% | Contract acquisition costs and other | $ 2,687 | 10.73% | $ 2,590 | 10.93% |
| Intangible assets, net | $290,421 | 20.94% | $ 271,188 | 23.82% | Goodwill | $ 9,048 | 36.12% | $ 9,039 | 38.15% |
| Notes receivable, net of allowances | $103,054 | 7.43% | $ 83,440 | 7.33% | Goodwill and intangible assets, net, total | $ 17,689 | 70.61% | $ 17,419 | 73.51% |
| Investments, employee benefit plans, at fair value | $24,978 | 1.80% | $ 19,398 | 1.70% | Equity method investments | $ 577 | 2.30% | $ 732 | 3.09% |
| Investments in unconsolidated entities | $78,655 | 5.67% | $ 109,016 | 9.58% | Notes receivable, net | $ 117 | 0.47% | $ 125 | 0.53% |
| Deferred income taxes | $20,747 | 1.50% | $ 30,613 | 2.69% | Deferred tax assets | $ 154 | 0.61% | $ 171 | 0.72% |
| Other assets | $97,442 | 7.03% | $ 84,400 | 7.41% | Operating lease assets | $ 888 | 3.54% | $ - 0 | 0.00% |
| Total assets | $1,386,672 | 100.00% | $ 1,138,370 | 100.00% | Other noncurrent assets | $ 595 | 2.38% | $ 587 | 2.48% |
| Current liabilities | Total assets | $ 25,051 | 100.00% | $ 23,696 | 100.00% | ||||
| Accounts payable | $73,449 | 5.30% | $ 73,511 | 6.46% | Current liabilities | ||||
| Accrued expenses and other current liabilities | $90,364 | 6.52% | $ 92,651 | 8.14% | Current portion of long-term debt | $ 977 | 3.90% | $ 833 | 3.52% |
| Current portion | $71,594 | 5.16% | $ 67,614 | 5.94% | Accounts payable | $ 720 | 2.87% | $ 767 | 3.24% |
| Liability for guest loyalty program | $82,970 | 5.98% | $ 83,566 | 7.34% | Accrued payroll and benefits | $ 1,339 | 5.35% | $ 1,345 | 5.68% |
| Current portion of long-term debt | $7,511 | 0.54% | $ 1,097 | 0.10% | Liability for guest loyalty program | $ 2,258 | 9.01% | $ 2,529 | 10.67% |
| Total current liabilities | $325,888 | 23.50% | $ 318,439 | 27.97% | Accrued expenses and other | $ 1,383 | 5.52% | $ 963 | 4.06% |
| Long-term debt | $844,102 | 60.87% | $ 753,514 | 66.19% | Total current liabilities | $ 6,677 | 26.65% | $ 6,437 | 27.16% |
| Long-term portion | $112,662 | 8.12% | $ 110,278 | 9.69% | Long-term debt | $ 9,963 | 39.77% | $ 8,514 | 35.93% |
| Deferred compensation and retirement plan obligations | $29,949 | 2.16% | $ 24,212 | 2.13% | Liability for guest loyalty program | $ 3,460 | 13.81% | $ 2,932 | 12.37% |
| Income taxes payable | $26,147 | 1.89% | $ 26,276 | 2.31% | Deferred tax liabilities | $ 290 | 1.16% | $ 485 | 2.05% |
| Operating lease liabilities | $21,270 | 1.53% | 0.00% | Deferred revenue | $ 840 | 3.35% | $ 731 | 3.08% | |
| Liability for guest loyalty program | $46,698 | 3.37% | $ 52,327 | 4.60% | Other noncurrent liabilities | $ 2,236 | 8.93% | $ 2,372 | 10.01% |
| Other liabilities | $3,467 | 0.25% | $ 37,096 | 3.26% | Shareholders’ equity | ||||
| Total liabilities | $1,410,183 | 101.70% | $ 1,322,142 | 116.14% | Class A Common Stock | $ 5 | 0.02% | $ 5 | 0.02% |
| Commitments and Contingencies | Additional paid-in-capital | $ 5,800 | 23.15% | $ 5,814 | 24.54% | ||||
| Common stock, $0.01 par value; 160,000,000 shares authorized; 95,065,638 shares issued at December 31, 2019 and December 31, 2018; 55,702,628 and 55,679,207 shares outstanding at December 31, 2019 and December 31, 2018, respectively | $951 | 0.07% | $ 951 | 0.08% | Retained earnings | $ 9,644 | 38.50% | $ 8,982 | 37.91% |
| Additional paid-in-capital | $231,160 | 16.67% | $ 213,170 | 18.73% | Treasury stock, at cost | $ (14,385) | -57.42% | $ (12,185) | -51.42% |
| Accumulated other comprehensive loss | -$4,550 | -0.33% | $ (5,446) | -0.48% | Accumulated other comprehensive loss | $ (361) | -1.44% | $ (391) | -1.65% |
| Treasury stock, at cost; 39,363,010 and 39,386,431 shares at December 31, 2019 and December 31, 2018, respectively | -$1,219,905 | -87.97% | $ (1,187,625) | -104.33% | Total shareholders’ equity | $ 703 | 2.81% | $ 2,225 | 9.39% |
| Retained earnings | $968,833 | 69.87% | $ 795,178 | 69.85% | Total liabilities and shareholders’ equity | $ 25,051 | 100.00% | $ 23,696 | 100.00% |
| Total shareholders’ deficit | -$23,511 | -1.70% | $ (183,772) | -16.14% | |||||
| Total liabilities and shareholders’ deficit | $1,386,672 | 100.00% | $ 1,138,370 | 100.00% | |||||
| Questions: | |||||||||
| 1. What are two accounts in the Choice Hotels balance sheet that show the biggest change over the past 2 years? What information in the 10-K report helps to explain these changes? | |||||||||
| 2. What are two accounts in the Marriott balance sheet that show the biggest change over the past 2 years? What information in the 10-K report helps to explain these changes? | |||||||||
| 3. Which of the two companies has the financially stronger balance sheet? Explain your rationale thoroughly. | |||||||||
The two accounts that show the biggest change in Choice Hotel's balance sheet are Property and Equipment, and Long-term Debt. Property and equipment costs saw increases in 2019 from $127,535 to $351,502. This was a 175% increase from the year prior. The increase was said to have stemmed from renovating an office building into a hotel. That hotel opened during the 2019 Fiscal Year. Choice Hotel also saw a large change in the amount of long term debt paid out in 2019. Upon agreement with a credit union that was reached in 2016, Choice paid out $844,102 in 2019 as opposed to $753,514 in 2018. This is a 12% increase. It is because Choice Hotel wanted to make advanced payments on that loan to avoid future interest.
The retained earnings account on the balance sheet shows that Choice Hotel has a financially stronger balance sheet. The company earned $968,833 in 2019 which shows an increase of 21.84% over the year prior. This represents a larger proportion when compared to Marriott Hotel's 7.37%.
Marriott International Inc. (2020, February 27). Retrieved May 1, 2020, from https://www.sec.gov/ix?doc=/Archives/edgar/data/1048286/000162828020002376/mar-q42019x10k.htm
The two accounts that show the biggest change in Marriott Hotel's balance sheet are Operating Lease Asset and Long-term Debt. Marriott Hotel paid out $888 million in operating lease assets in 2019. In 2018 they paid $0. According to the 10k, Marriott described this as "lease expense relating to fixed payments is recognized on a straight-line basis over the lease term and lease expense relating to variable payments is expensed as incurred. (Marriott 2020)" In 2018, Marriott paid out $8.514 billion in long term debt. In 2019 they paid out $9.963 billion in long term debt, a 17% increase. This is from the same strategy to avoid future interest accumulating, The company is engaged in a strategy to minimize future risk by using more cash to attempt to pay out as much debt as they can as early as possible.
Cash Flow
| Common Size Statements of Cash Flow | 12 Months Ended | Common Size Statements of Cash Flow | 12 Months Ended | ||||||||||
| Consolidated Statements of Cash Flows | Dec. 31, 2019 | % of Total Revenue | Dec. 31, 2018 | % of Total Revenue | Dec. 31, 2017 | % of Total Revenue | Consolidated Statements of Cash Flows - ($ in Millions) | Dec. 31, 2019 | % of Total Revenue | Dec. 31, 2018 | % of Total Revenue | Dec. 31, 2017 | % of Total Revenue |
| CASH FLOWS FROM OPERATING ACTIVITIES | OPERATING ACTIVITIES | ||||||||||||
| Net income | $ 222,878,000 | 19.99% | $216,355,000 | 20.78% | $122,327,000 | 13.00% | Net income | $ 1,273 | 6.07% | $ 1,907 | 9.19% | $ 1,459 | 7.13% |
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile to cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | $ 18,828,000 | 1.69% | 14,330,000 | 1.38% | 6,680,000 | 0.71% | Depreciation, amortization, and other | $ 403 | 1.92% | $ 284 | 1.37% | $ 279 | 1.36% |
| Depreciation and amortization - marketing and reservation system | $ 17,294,000 | 1.55% | 19,597,000 | 1.88% | 20,609,000 | 2.19% | Share-based compensation | $ 187 | 0.89% | $ 184 | 0.89% | $ 181 | 0.88% |
| Franchise agreement acquisition cost amortization | $ 7,992,000 | 0.72% | 9,239,000 | 0.89% | 7,191,000 | 0.76% | Income taxes | $ (200) | -0.95% | $ (239) | -1.15% | $ 887 | 4.34% |
| Impairment of goodwill | $ 3,097,000 | 0.28% | 4,289,000 | 0.41% | 0 | 0.00% | Liability for guest loyalty program | $ 257 | 1.23% | $ 520 | 2.51% | $ 298 | 1.46% |
| Impairment of long-lived assets | $ 7,259,000 | 0.65% | 0 | 0.00% | 0 | 0.00% | Contract acquisition costs | $ (195) | -0.93% | $ (152) | -0.73% | $ (185) | -0.90% |
| Loss on sale of business | $ 4,674,000 | 0.42% | 0 | 0.00% | 0 | 0.00% | Merger-related charges | $ 86 | 0.41% | $ 16 | 0.08% | $ (124) | -0.61% |
| Loss on debt extinguishment | $ 7,188,000 | 0.64% | 0 | 0.00% | 0 | 0.00% | Working capital changes | $ (273) | -1.30% | $ (76) | -0.37% | $ (30) | -0.15% |
| Gain on disposal of assets, net | $ (2,103,000) | -0.19% | -56,000 | -0.01% | -237,000 | -0.03% | (Gain) loss on asset dispositions | $ (147) | -0.70% | $ (194) | -0.93% | $ (687) | -3.36% |
| Provision for bad debts, net | $ 8,240,000 | 0.74% | 10,542,000 | 1.01% | 5,514,000 | 0.59% | Other | $ 294 | 1.40% | $ 107 | 0.52% | $ 149 | 0.73% |
| Non-cash stock compensation and other charges | $ 17,615,000 | 1.58% | 15,986,000 | 1.54% | 22,857,000 | 2.43% | Net cash provided by operating activities | $ 1,685 | 8.03% | $ 2,357 | 11.35% | $ 2,227 | 10.89% |
| Non-cash interest and other investment (income) loss | $ (4,010,000) | -0.36% | 3,695,000 | 0.35% | -772,000 | -0.08% | INVESTING ACTIVITIES | ||||||
| Deferred income taxes | $ 9,810,000 | 0.88% | -3,510,000 | -0.34% | 57,106,000 | 6.07% | Capital expenditures | $ (653) | -3.11% | $ (556) | -2.68% | $ (240) | -1.17% |
| Equity in net losses from unconsolidated joint ventures, less distributions received | $ 12,562,000 | 1.13% | 7,389,000 | 0.71% | 6,579,000 | 0.70% | Dispositions | $ 395 | 1.88% | $ 479 | 2.31% | $ 1,418 | 6.93% |
| Franchise agreement acquisition cost, net of reimbursements | $ (38,944,000) | -3.49% | -52,929,000 | -5.08% | -30,638,000 | -3.25% | Loan advances | $ (30) | -0.14% | $ (13) | -0.06% | $ (93) | -0.45% |
| Change in working capital and other, net of acquisition | $ (21,824,000) | -1.96% | -2,031,000 | -0.20% | 40,158,000 | 4.27% | Loan collections | $ 51 | 0.24% | $ 48 | 0.23% | $ 187 | 0.91% |
| Net cash provided by operating activities | $ 270,556,000 | 24.27% | 242,896,000 | 23.33% | 257,374,000 | 27.34% | Other | $ (47) | -0.22% | $ (10) | -0.05% | $ (61) | -0.30% |
| CASH FLOWS FROM INVESTING ACTIVITIES | Net cash (used in) provided by investing activities | $ (284) | -1.35% | $ (52) | -0.25% | $ 1,211 | 5.92% | ||||||
| Investment in property and equipment | $ (57,342,000) | -5.14% | -47,673,000 | -4.58% | -23,437,000 | -2.49% | FINANCING ACTIVITIES | ||||||
| Investment in intangible assets | $ (6,699,000) | -0.60% | -1,803,000 | -0.17% | -2,517,000 | -0.27% | Commercial paper/Credit Facility, net | $ 951 | 4.53% | $ (129) | -0.62% | $ 60 | 0.29% |
| Proceeds from sales of assets | $ 1,058,500 | 0.09% | 3,053,000 | 0.29% | 1,000,000 | 0.11% | Issuance of long-term debt | $ 1,397 | 6.66% | $ 1,646 | 7.93% | $ - 0 | 0.00% |
| Asset acquisition, net of cash acquired | $ (168,954,000) | -15.16% | -3,179,000 | -0.31% | 0 | 0.00% | Repayment of long-term debt | $ (835) | -3.98% | $ (397) | -1.91% | $ (310) | -1.52% |
| Proceeds from sale of unconsolidated joint venture | $ 8,937,000 | 0.80% | 0.00% | 0.00% | Issuance of Class A Common Stock | $ 7 | 0.03% | $ 4 | 0.02% | $ 6 | 0.03% | ||
| Business acquisition, net of cash acquired | $ - 0 | -231,317,000 | -22.21% | 0 | 0.00% | Dividends paid | $ (612) | -2.92% | $ (543) | -2.62% | $ (482) | -2.36% | |
| Payment on business disposition, net | $ (10,783,000) | -0.97% | 0.00% | 0.00% | Purchase of treasury stock | $ (2,260) | -10.78% | $ (2,850) | -13.73% | $ (3,013) | -14.73% | ||
| Contributions to equity method investments | $ (27,828,000) | -2.50% | -9,604,000 | -0.92% | -50,554,000 | -5.37% | Share-based compensation withholding taxes | $ (148) | -0.71% | $ (105) | -0.51% | $ (157) | -0.77% |
| Distributions from equity method investments | $ 10,241,000 | 0.92% | 1,429,000 | 0.14% | 4,569,000 | 0.49% | Other | $ (8) | -0.04% | $ - 0 | 0.00% | $ - 0 | 0.00% |
| Purchases of investments, employee benefit plans | $ (3,175,000) | -0.28% | -2,895,000 | -0.28% | -2,447,000 | -0.26% | Net cash (used in) provided by financing activities | $ (1,508) | -7.19% | $ (2,374) | -11.44% | $ (3,896) | -19.05% |
| Proceeds from sales of investments, employee benefit plans | $ 2,217,000 | 0.20% | 2,825,000 | 0.27% | 2,245,000 | 0.24% | DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | $ (107) | -0.51% | $ (69) | -0.33% | $ (458) | -2.24% |
| Issuance of notes receivable | $ (20,722,000) | -1.86% | -36,045,000 | -3.46% | -19,738,000 | -2.10% | CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, beginning of period (1) | $ 360 | 1.72% | $ 429 | 2.07% | $ 887 | 4.34% |
| Collections of notes receivable | $ 14,231,000 | 1.28% | 4,997,000 | 0.48% | 655,000 | 0.07% | CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, end of period (1) | $ 253 | 1.21% | $ 360 | 1.73% | $ 429 | 2.10% |
| Other items, net | $ (1,875,000) | -0.17% | -1,040,000 | -0.10% | 109,000 | 0.01% | Restricted cash | 28 | 0.13% | 44 | 0.21% | $ - 0 | 0.00% |
| Net cash used in investing activities | $ (251,167,000) | -22.53% | -321,252,000 | 30.85% | -90,115,000 | -9.57% | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||||
| Proceeds from issuance of long term debt | $ 422,376,000 | 37.89% | 9,037,000 | 0.87% | 0 | 0.00% | |||||||
| Net (repayments) borrowings pursuant to revolving credit facilities | $ (72,400,000) | -6.49% | 20,600,000 | 1.98% | -115,003,000 | -12.22% | |||||||
| Principal payments on long-term debt | $ (256,809,000) | -23.04% | -603,000 | -0.06% | -660,000 | -0.07% | |||||||
| Debt issuance costs | $ (3,936,000) | -0.35% | -2,590,000 | -0.25% | 0 | 0.00% | |||||||
| Purchases of treasury stock | $ (50,638,000) | -4.54% | -148,679,000 | -14.28% | -9,807,000 | -1.04% | |||||||
| Dividends paid | $ (48,089,000) | -4.31% | -48,715,000 | -4.68% | -48,651,000 | -5.17% | |||||||
| Proceeds from transfer of interest in notes receivable | $ (24,409,000) | -2.19% | 173,000 | 0.02% | 24,237,000 | 2.57% | |||||||
| Proceeds from exercise of stock options | $ 21,410,000 | 1.92% | 41,360,000 | 3.97% | 14,107,000 | 1.50% | |||||||
| Net cash used in financing activities | $ (12,495,000) | -1.12% | -129,417,000 | -12.43% | -135,777,000 | -14.42% | |||||||
| Net change in cash and cash equivalents | $ 6,894,000 | 0.62% | -207,773,000 | -19.95% | 31,482,000 | 3.34% | |||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | $ 230,000 | 0.02% | -921,000 | -0.09% | 1,391,000 | 0.15% | |||||||
| Cash and cash equivalents at beginning of period | $ 26,642,000 | 2.39% | 235,336,000 | 22.60% | 202,463,000 | 21.51% | |||||||
| Cash and cash equivalents at end of period | $ 33,766,000 | 3.03% | 26,642,000 | 2.56% | 235,336,000 | 25.00% | |||||||
| Cash payments during the year for: | |||||||||||||
| Income taxes, net of refunds | $ 41,859,000 | 3.75% | 77,357,000 | 7.43% | 39,181,000 | 4.16% | |||||||
| Interest, net of capitalized interest | $ 48,179,000 | 4.32% | 43,254,000 | 4.15% | 42,405,000 | 4.50% | |||||||
| Non-cash investing and financing activities: | |||||||||||||
| Dividends declared but not paid | $ 12,535,000 | 1.12% | 11,977,000 | 1.15% | 12,185,000 | 1.29% | |||||||
| Investment in property, equipment and intangibles acquired in accounts payable and accrued liabilities | $ 959,000 | 0.09% | 5,949,000 | 0.57% | 1,099,000 | 0.12% | |||||||
| Seller-financing to purchaser | $ - 0 | $0 | $2,000,000 | 0.21% | |||||||||
| Questions: | |||||||||||||
| 1. What were the two largest cash outflows for each company over the 3-year period? | |||||||||||||
| 2. Why did Marriott have a cash inflow in 2017 from investing activities? Hint: See 10-K Report. | |||||||||||||
| 3. What are the most significant trends for both companies? | |||||||||||||
The acquisition of WoodSpring Suites had major impacts on the cash flow for Choice Hotel. In terms of money spent towards asset acquisition, there was a dramatic increase of cash spent in 2018 on asset acquisition as well as a deficit in net of cash acquired. In 2018, Choice Hotels spent $3.179 million and $168.954 million in 2019. In 2017 they spent $0. Marriott Hotel spent a large amount in 2018 on investing activities, however the substantial decrease in 2019 is their biggest trend for cassflow. All stemming from reducing their spending on investing.
In 2017Marriott Hotel has a disproportionate increase of 73.4% to the franchise fees of$1,157 million in 2016, to $2,006 million in 2019. This led to an increase in cash available to the company.
In 2018, Choice Hotels began to utilize a much more significant amount of cash in investing activities. The driving force of this was the acquisition of WoodSpring Suites. The acquisition and further investment activities recquired, saw an increase of 256% from 2017-2018. While there was a decrease going into 2019, the company still had a very large sum of cash $251,167,000 which was used for further investment activities. On the other hand Marriott Hotel used a large sum of cash to purchase treasury stocks in 2019 totalling $2.260 billion. This amount to 26.1% lower than the amount of $2.850 billionin 2018 , but still represent a large cash outflow for the company. The other largest cash outflow for Marriott Hotel was the use of cash in financing activities. This is the total of all cash used in matters like debt paid, issuance of stocks, purchasing treasury stocks, etc. In 2019, Marriott spent a net of $1.508 billion on these activities. In comparison to 2018's usage of $2.374 billion, that number was a 36.4% drop in amount of cash used for financing activities.
Budget and Forecast
| In a February 15, 2020 Press Release, Choice Hotels announced the company's 2019 fourth quarter and full year results. Using the data from this press release, create a 2020 budget and forecast. | |||||
| http://investor.choicehotels.com/financial-performance-and-presentations?item=46 | |||||
| To complete the budget, use the following information: | |||||
| Revenues are expected to grow at a rate of 2.5% according to the full-year outlook. | |||||
| Given the expected growth and recent investments, expenses are expected to increase by 1%. | |||||
| Income taxes are expected to be 22% | |||||
| To complete the forecast, use the following information: | |||||
| The low-range forecast is expected to be 2% | |||||
| The mid-range forecast is expected to be 2.5% | |||||
| The high-range forecast is expected to be 3% | |||||
| Forecast | Forecast | Forecast | |||
| Budget | Low | Midpoint | High | ||
| Consolidated Statements of Income - USD ($) | Dec. 31, 2019 | Dec. 31, 2020 | Dec. 31, 2020 | Dec. 31, 2020 | Dec. 31, 2020 |
| REVENUES: | |||||
| Royalty fees | $388,151 | $ 397,855 | $ 395,914 | $ 397,855 | $ 399,796 |
| Initial franchise and relicensing fees | $27,489 | $ 28,176 | $ 28,039 | $ 28,176 | $ 28,314 |
| Procurement services | $61,429 | $ 62,965 | $ 62,658 | $ 62,965 | $ 63,272 |
| Marketing and reservation system | $577,426 | $ 591,862 | $ 588,975 | $ 591,862 | $ 594,749 |
| Owned Hotels | $20,282 | $ 20,789 | $ 20,688 | $ 20,789 | $ 20,890 |
| Other | $40,043 | $ 41,044 | $ 40,844 | $ 41,044 | $ 41,244 |
| Total revenues | $1,114,820 | $ 1,142,691 | $ 1,137,116 | $ 1,142,691 | $ 1,148,265 |
| OPERATING EXPENSES: | |||||
| Selling, general and administrative | $168,833 | $ 173,054 | $ 172,210 | $ 173,054 | $ 173,898 |
| Depreciation and amortization | $18,828 | $ 19,299 | $ 19,205 | $ 19,299 | $ 19,393 |
| Marketing and reservation system | $579,139 | $ 593,617 | $ 590,722 | $ 593,617 | $ 596,513 |
| Owned Hotels | $14,448 | $ 14,809 | $ 14,737 | $ 14,809 | $ 14,881 |
| Total operating expenses | $781,248 | $ 800,779 | $ 796,873 | $ 800,779 | $ 804,685 |
| Impairment of goodwill | -$3,097 | $ (3,174) | $ (3,159) | $ (3,174) | $ (3,190) |
| Gain on sale of assets, net | $100 | $ 102 | $ 102 | $ 103 | $ 103 |
| Operating income | $318,642 | $ 326,608 | $ 325,015 | $ 326,608 | $ 328,201 |
| OTHER INCOME AND EXPENSES, NET: | |||||
| Interest expense | $46,807 | $ 47,977 | $ 47,743 | $ 47,977 | $ 48,211 |
| Interest income | -$9,996 | $ (10,096) | $ (10,196) | $ (10,246) | $ (10,296) |
| Loss on extinguishment of debt | $7,188 | $ 7,260 | $ 7,332 | $ 7,368 | $ 7,404 |
| Other (gain) loss | -$4,862 | $ (4,911) | $ (4,959) | $ (4,984) | $ (5,008) |
| Equity in net (income) loss of affiliates | $9,576 | $ 9,672 | $ 9,768 | $ 9,815 | $ 9,863 |
| Total other income and expenses, net | $48,713 | $ 49,200 | $ 49,687 | $ 49,931 | $ 50,174 |
| Income before income taxes | $269,929 | $ 272,628 | $ 275,328 | $ 276,677 | $ 278,027 |
| Income taxes | $47,051 | $ 57,402 | $ 60,572 | $ 60,869 | $ 61,166 |
| Net income | $222,878 | $ 228,450 | $ 214,756 | $ 215,808 | $ 216,861 |
| Basic earnings per share: | |||||
| Basic earnings per share (in dollars per share) | $4.00 | $ 4.10 | $ 4.08 | $ 4.10 | $ 4.12 |
| Diluted earnings per share (in dollars per share) | $3.98 | $ 4.08 | $ 4.06 | $ 4.08 | $ 4.10 |
| Target | Expectation | Expectation | Expectation | ||
| Questions: | |||||
| 1. Which revenue category is the most important to forecast accurately? Explain your rationale for your selection and how you developed your three estimates thoroughly . | |||||
| 2. Which expense category is the most important to forecast accurately? Explain your rationale for your selection and how you developed your three estimates thoroughly . | |||||
| T | |||||
| 3. Explain thoroughly how you developed your budget estimates for all revenue and operating expense accounts. | |||||
The marketing and reservation system category the most important expense category to forecast accurately because this category makes up the majority of the company's operating expenses. It covers overall franchises services such as hotel reservations marketing, media, and advertisement.In 2019 this category totaled 74.13% of Choice's operating expenses. The low-range forcast was expected to increase by 2% as a result, the budget totaled $588,975; the mid-range forcast was expected to increase by 2.5% at $591,862; the high-range forcast was expected to increase by 3% at $594,749.
Choice Hotel would need to forecast its Royalty, initial franchising and relicensing fees accurately as these fees aid in the company operating a profitable business. The Company achieve 97% of total revenue from its franchising business and this allows for economies of scale benefits that are inherent in the franchising business. The fee and cost structure of the company provides opportunities to improve operating results by increasing the number of franchised hotel rooms and effective royalty rates from franchise contracts resulting in increased initial and relicensing fee revenue, ongoing royalty fees and procurement services revenues. Choice Hotel’s revenue is derived primarily from various franchise fees which consist of an initial fee and ongoing royalty, marketing and reservation system fees that are typically based on a percentage of the franchised hotel’s gross room revenues. The initial fee and ongoing royalty portion of the franchise fees are intended to cover operating expenses, such as business development expenses, quality assurance, administrative support, and certain franchise services.
Companies develop budget estimates to determine the level of funding and projected cash flow that the business may need for an upcoming period. The budget estimates for Choice Hotel was developed by projecting revenue to grow by a rate of 2.5% and expenses to grow by 1% except income taxes which was projected to increase by 22%, when compared to 2019 financial year. A forecast was also developed for the Company low-range budget forecast to be increased by 2%, the mid-range range forecast to be increased by 2.5% and the high-range forecast to be 3%. The company may decide to use a particular budget range base on economic activities, and this also depends upon if market conditions are favorable or unfavorable to the company.
Cost 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 overhead | $30,000 | $30,000 | $30,000 | Supervision | $1,700,000 | |||||||
| 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: | ||||||||||||
| 1 | Total manufacturing overhead costs | |||||||||||
| Rate per unit | # of Rooms | Total Overhead | % of total Overhead | |||||||||
| Standard | $140,000 | 150 | $21,000,000 | 28.51% | ||||||||
| Junior | $240,000 | 110 | $26,400,000 | 35.85% | ||||||||
| Presidential | $1,050,000 | 25 | $26,250,000 | 35.64% | ||||||||
| $73,650,000 | ||||||||||||
| 2 | Labor Hours | Units | Total labor Hours | Total Cost of labor | Labor per unit | % of total labor | Overhead per unit | |||||
| Standard | 1,200 | 150 | 180000 | $8,100,000.00 | $54,000 | 24% | $118,901.38 | |||||
| Junior | 1,300 | 110 | 143000 | $9,349,340.00 | $84,994 | 28% | $187,146.36 | |||||
| Presidential | 5,940 | 25 | 148500 | $15,999,390.00 | $639,976 | 48% | $1,409,147.76 | |||||
| Totals | 8,440 | 285 | 471500 | $33,448,730.00 | $778,970 | 100% | ||||||
| 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 | $ 1,454,545.45 | $872,727.27 | $872,727.27 | $ 3,200,000.00 | |
| Maintenance | $1,800,000 | Direct labor hours | 180,000 | 143,000 | 148,500 | 471,500 | $ 3.82 | $ 687,168.61 | $545,917.29 | $566,914.10 | $ 1,800,000.00 | |
| Purchasing | $320,000 | # of purchase orders | 2,500 | 1,500 | 9,000 | 13,000 | $ 24.62 | $ 61,538.46 | $36,923.08 | $221,538.46 | $ 320,000.00 | |
| Inspection | $850,000 | # of inspections | 1,000 | 850 | 3,500 | 5,350 | $ 158.88 | $ 158,878.50 | $135,046.73 | $556,074.77 | $ 850,000.00 | |
| Indirect | $490,000 | Units manufactured | 150 | 110 | 25 | 285 | $ 1,719.30 | $ 257,894.74 | $189,122.81 | $42,982.46 | $ 490,000.00 | |
| materials | ||||||||||||
| Supervision | $1,700,000 | # of inspections | 1,000 | 850 | 3,500 | 5,350 | $ 317.76 | $ 317,757.01 | $270,093.46 | $1,112,149.53 | $ 1,700,000.00 | |
| Supplies | $190,000 | Units manufactured | 150 | 110 | 25 | 285 | $ 666.67 | $ 100,000.00 | $73,333.33 | $16,666.67 | $ 190,000.00 | |
| Total | $8,550,000 | 234,800 | 176,420 | 194,550 | 605,770 | $2,920.12 | $3,037,782.78 | $2,123,163.96 | $3,389,053.26 | $ 8,550,000.00 | ||
| Answer Questions 3 to 10 Below: | Allocation Basis | Activity Based Costing | ||||||||||
| 3 | Type | Cost | Cost Driver | Standard | Junior | Presidential | Totals | Standard | Junior | Presidential | Totals | |
| Depreciation | $ 3,200,000.00 | Square ft. | 50000 | 30000 | 30000 | 110000 | $ 1,454,545.45 | $ 872,727.27 | $ 872,727.27 | $ 3,200,000.00 | ||
| Maintenance | $ 1,800,000.00 | Direct labor hrs. | 180000 | 143000 | 148500 | 471500 | $ 687,168.61 | $ 545,917.29 | $ 566,914.10 | $ 1,800,000.00 | ||
| Purchasing | $ 320,000.00 | # purchase orders | 2500 | 1500 | 9000 | 13000 | $ 61,538.46 | $ 36,923.08 | $ 221,538.46 | $ 320,000.00 | ||
| Inspection | $ 850,000.00 | # of inspections | 1000 | 850 | 3500 | 5350 | $ 158,878.50 | $ 135,046.73 | $ 556,074.77 | $ 850,000.00 | ||
| Indirect materials | $ 490,000.00 | # of units | 150 | 110 | 25 | 285 | $ 257,894.74 | $ 189,122.81 | $ 42,982.46 | $ 490,000.00 | ||
| Supervision | $ 1,700,000.00 | # of inspections | 1000 | 850 | 3500 | 5350 | $ 317,757.01 | $ 270,093.46 | $ 1,112,149.53 | $ 1,700,000.00 | ||
| Supplies | $ 190,000.00 | # of units | 150 | 110 | 25 | 285 | $ 100,000.00 | $ 73,333.33 | $ 16,666.67 | $ 190,000.00 | ||
| Total manufacturing overhead cost | $ 8,550,000.00 | Total manufacturing overhead cost | $234,800.00 | $176,420.00 | $194,550.00 | $605,770.00 | Total manufacturing overhead cost | $ 3,037,782.78 | $ 2,123,163.96 | $ 3,389,053.26 | $ 8,550,000.00 | |
| 4 | Direct Materials | $ 16,666.67 | ||||||||||
| Direct Labor | $ 566,914.10 | |||||||||||
| Allocated Overhead Cost | $ 135,562.13 | |||||||||||
| Total Manufacturing Cost | $ 719,142.90 | |||||||||||
| 5 | Current selling price | $1,050,000 | No, The presidential suite is not being sold at the total cost of production because the direct expenses exceed the selling price by $35,562.13 | |||||||||
| Direct Expenses (Direct materials, Direct Labor & Allocated overhead Cost per unit) | $1,085,562 | |||||||||||
| ($35,562.13) | ||||||||||||
| 6 | Current Selling price | $1,050,000 | ||||||||||
| Direct Labor | $ 640,000.00 | |||||||||||
| Direct Materials | $310,000 | |||||||||||
| Allocated overhead cost | $ 135,562.13 | |||||||||||
| Total Overhead | $ 1,085,562.13 | |||||||||||
| Current Gross profit margin | -3.39% | |||||||||||
| Current Selling price + 3.39% | 35595 | |||||||||||
| Suggested selling price | $1,085,595 | |||||||||||
| 7 | Current Selling price (standard) | $140,000 | ||||||||||
| Direct Labor | $ 54,000.00 | |||||||||||
| Direct Materials | $30,000 | |||||||||||
| Allocated overhead cost | $1,565.33 | |||||||||||
| Total Overhead | $ 85,565.33 | |||||||||||
| Current Gross profit margin | 38.88% | |||||||||||
| current selling price (presidential) | $1,050,000 | |||||||||||
| suggested selling price * Current gross profit margin | $407,400.00 | |||||||||||
| Suggested selling price | $1,457,400 | |||||||||||
| 8 | New price (Presidential) | $1,457,400 | ||||||||||
| Direct Labor | $ 640,000.00 | |||||||||||
| Direct Materials | $310,000 | |||||||||||
| Allocated overhead cost | 338905.326006182 | |||||||||||
| Total Overhead | $ 1,288,905.33 | Choice Hotel would be making a profit if the Presidential Suites were sold at the new price. | ||||||||||
| 9 | If Choice Hotel is unable to increase the cost of the Presidential Suite from $1,050,000 then the Hotel should increase number of units to at least 35 in order to make a profit of 0.30% | |||||||||||
| Current selling price | $1,050,000.00 | |||||||||||
| Direct Labor | $640,000.00 | |||||||||||
| Direct Materials | $310,000.00 | |||||||||||
| Allocated overhead cost /35 units | $96,830.09 | |||||||||||
| Total overhead | $1,046,830.09 | |||||||||||
| Gross profit margin | 0.30% | |||||||||||
| 10 | Break Even = Fixed Cost/(Selling Price-Variable Cost) | |||||||||||
| Fixed Cost | 3.9617198668 | |||||||||||
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 should price should Choice Hotels charges 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.
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.
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.
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.
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: 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.
The cost-allocation system uses one cost pool for each department. This may not be the most accurate way to allocate cost to a product, as during the production process there are cost activities/materials that may be required in order to produce an end production. Costing should be allocated based on the use of the material or activities.
