Sherton Case

Executive Summary

The purpose of this report is to analyze the qualitative and quantitative factors affecting George's decision to accept or reject an ongoing contract with Alitalia. After an analysis of the incremental income and expenses associated with the contract, I recommend that Sheraton accept the contract.

Firstly, the hotel will be the only hotel in Montreal to service the airline and will benefit by taking the business from its competitors. The hotel will also be referred to all airline passengers flying with Alitalia, which will also provide more exposure for Sheraton.

Secondly, the weekly cash flow guarantee will allow Sheraton to improve their cash flow activity. Last year the company suffered a 2 million deficit due to poor cash flow. This opportunity will give the company a chance to bring their cash-flow up to normal standards.

Thirdly, the company will be able to negotiate a new contract with the airline upon renewal. The airline states that they are willing to increase their room rates after one year of service. Given that they build a relationship with the airline they will likely be able to charge a higher rate.

The expenses incurred with this new contract are outlined in the report and include the additional costs such as laundry, additional staff, housekeeping and utilities for each room. Theses totals will help Sheraton stay updated with their break-even points.

Introduction

The following report will review the issues and opportunities that would occur given the acceptance or rejection of the Alitalia contract. The contract outlines a request for Sheraton to provide rooms for the airlines employees. However, at the discounted rate that Alitalia is requesting, we will have to analyze the qualitative and quantitative factors involved with the decision. First, the quantitative will have to be examined to find the additional revenue, opportunity costs and income or loss. Secondly, the qualitative factors such as contract extensions; company exposure and future customers will be reviewed. This will outline a possible recommendation for Sheraton on how to proceed with the given contract. With the short deadline in place, it will be important for all relevant information to be examined in order to make the most feasible decision.

Background Information

* Sheraton hotel has 824 rooms that rent out for $105/night normally

* Airline employees will spend less on food and beverages at the hotel

* Average food revenue last year was $17 and beverage was $13

* Fringe benefits are 35% of wages

* Alitalia contract is for 40 rooms at $42/night for one year

* Hotel rooms will have to be cleaned immediately

* Number of sold out nights is 115

* Bills paid within seven days of receipt of statement

* Crew allowance of $25,000 per day available

* One additional font desk clerk to handle Alitalia ($9.20/hour)

* Contract between George Villedary (Director general of Le Centre Sheraton, Montreal) and Alitalia. Marie Alferi is George's assistant who will also be involved

* Housekeeping is 30 minutes per room, $8.60/hour

* Laundry is $0.75 per room

* Utilities are $1.00 per room

* Amenities are $2.25 per room

* Sheraton objective is 12% ROI

* $4.2 million annual taxes

* Cash flow last year = $2 million

* $50 million in long-term mortgage at floating interest

Quantitative Analysis

In order to fully understand the financial impact that this contract will have on the Sheraton hotel, the following calculations were essential:

* Additional revenue

* Opportunity costs

* Other additional costs

* Incremental income/loss

Additional Revenue

Sales