Module 4 Case Study: Caesars Palace Las Vegas Made Headlines

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Caesars Palace® Las Vegas recently underwent a $75 million renovation, primarily focusing on the Roman Tower, which was last updated 14 years ago. During this period, the Roman Tower was closed, and a major renovation was undertaken on the 567 rooms housed within it. The renovated tower was renamed Julius Tower upon reopening on January 1, 2016, with enhancements to existing rooms and the addition of 33 new guest rooms. Post-renovation, Caesars anticipates that the average room rate will be approximately $150 per night, representing a 20% increase from previous rates, reflecting the upgrades.

The Julius Tower is expected to have around 16,000 room nights booked per month, corresponding to an occupancy rate of approximately 88.88%. The target operating income for this tower is set at $2,000,000 per month, with annual fixed operating costs of $4,680,000, which is an increase of $200,000 annually compared to pre-renovation costs. Variable costs per room night are projected at $27 after renovation, up from $20 prior to the renovation.

In this scenario, the accounting department is tasked with conducting a What-If analysis using Excel’s Data Table feature. The analysis aims to evaluate how changes in sales price and volume impact monthly operating income. The analysis considers a range of sales prices from $50 to $200 in $10 increments and room night bookings from 1,000 to 20,000 in 1,000 increments. The goal is to determine the breakeven point, assess the feasibility of meeting the monthly income target, and explore options for cost reduction. Additionally, the management team seeks insights into risk factors and strategic considerations regarding the tower’s financial performance.

Paper For Above instruction

The analysis of Caesars Palace’s Julius Tower financial performance involves evaluating various scenarios impacting revenue, costs, and profitability. Conducting a comprehensive What-If analysis in Excel, as outlined, provides crucial insights for decision-making. This paper discusses the key findings from the analysis, addresses the specific questions posed by Logan Lacy, and offers strategic recommendations for optimizing the tower’s financial outcomes.

Breakeven Analysis at a Sales Price of $150 per Night

To determine how many hotel room nights need to be booked at a $150 nightly rate to break even, we begin with the core profit equation:

Profit = (Sales Price per Night × Number of Nights) - Variable Costs - Fixed Costs

Given that the targeted operating income is zero at breakeven, the equation simplifies to:

(150 × N) - (27 × N) - 4,680,000 = 0

Simplifying:

(150 - 27) × N = 4,680,000

123 × N = 4,680,000

N = 4,680,000 / 123 ≈ 38,049 room nights

Therefore, approximately 38,049 room nights are necessary to break even at a $150 rate, which is significantly higher than the expected 16,000 bookings. At the current booking level, the tower would operate at a loss, indicating that either the pricing needs adjustment, or other cost strategies should be considered.

Sales Price Needed for 16,000 Room Nights to Break Even

To find the sales price per night required to break even with 16,000 room nights booked, the profit equation is rearranged:

(Price × 16,000) - (27 × 16,000) - 4,680,000 = 0

Let P represent the required sales price:

P × 16,000 = (27 × 16,000) + 4,680,000

P = [(27 × 16,000) + 4,680,000] / 16,000

P = (432,000 + 4,680,000) / 16,000 = 5,112,000 / 16,000 ≈ $319.50

Thus, to break even with 16,000 bookings per month, the nightly rate must be approximately $319.50. Since the current plan aims for a $150 rate, the tower must significantly increase the rate or boost occupancy beyond expectations.

Achieving the Monthly Operating Income Target

At a $150 Rate and 16,000 Room Nights

Calculating the current scenario:

Total revenue = 16,000 × $150 = $2,400,000

Variable costs = 16,000 × $27 = $432,000

Fixed costs (annual) = $4,680,000 / 12 ≈ $390,000 per month

Total costs = Variable costs + Fixed costs = $432,000 + $390,000 = $822,000

Operating income = Revenue - Total costs = $2,400,000 - $822,000 = $1,578,000

Since this is below the target of $2,000,000, increasing the number of bookings or sales price would be necessary. To reach $2,000,000, the tower needs additional revenue of $422,000, which could be achieved through higher occupancy or increased rates.

At a $150 Rate, Required Room Nights to Meet Income Target

Setting the profit equation:

(150 × N) - (27 × N) - 390,000 = 2,000,000

(123 × N) = 2,390,000

N ≈ 2,390,000 / 123 ≈ 19,423 room nights

The tower would need to book approximately 19,423 room nights to hit the target, more than the expected 16,000. This indicates a shortfall unless occupancy increases or sales prices are raised.

Cost Reduction Opportunities

To improve profitability without increasing the number of room nights or prices, Julius Tower could evaluate and potentially reduce certain costs. Examples include:

1. Staffing Costs (Fixed): Adjust staffing levels during off-peak hours to reduce wages.
2. Maintenance Costs (Variable): Optimize preventive maintenance schedules to prevent costly repairs and reduce variable expenses.
3. Utilities (Variable): Implement energy-saving measures such as LED lighting and smart thermostats to lower utility bills.
4. Supplies and Amenities (Variable): Review procurement contracts to negotiate better terms or switch to less expensive suppliers.
5. Marketing and Promotional Expenses (Fixed): Focus on targeted marketing campaigns to improve ROI and reduce overall advertising spend.

Recognizing which costs are variable or fixed is crucial for effective cost management. Typically, staffing and utilities have variable components, whereas maintenance and marketing often have fixed elements that can be scaled or optimized.

Risk of Not Reaching Break-Even

The analysis indicates that under current assumptions, with an expected 16,000 room nights booked at $150, the Julius Tower would operate at a profit well below the break-even point. Conversely, to break even at this nightly rate, the required volume exceeds projections significantly. Therefore, unless occupancy rates increase dramatically or prices are raised substantially, there is a risk of operating at a loss. External factors such as market demand, competition, and economic conditions could further impact bookings, heightening this risk. Strategic actions are necessary to mitigate this risk, including marketing efforts, promotional deals, or cost reductions.

Managerial Perspective on Operating Income Goals

As a hypothetical manager, I would evaluate Caesars’ target of $2,000,000 in monthly operating income as ambitious but potentially achievable with strategic adjustments. Given the current booking expectations and the high fixed costs, reaching this goal would require increasing occupancy significantly or elevating room rates. Market research suggests that a substantial rate increase might not be feasible without deterring bookings. Therefore, balancing the goal with realistic operational adjustments, such as targeted marketing to boost occupancy or cost optimization, would be prudent. The target might be considered slightly optimistic if external market conditions remain unchanged, but with proactive management, it remains within reach.

Conclusion

The comprehensive analysis highlights the importance of dynamic pricing, occupancy management, and cost control in maintaining profitability for Julius Tower. While current projections suggest challenges in meeting the income target, strategic initiatives focusing on revenue enhancement and cost efficiencies could bridge the gap. Continuous monitoring and flexible adjustment plans are essential for optimizing financial performance in the competitive Las Vegas hospitality market.

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