Table of Contents

Executive Summary 2
Introduction 3
Issues and Alternatives 3 Accept or Refuse Contract 3 Servicing Alitalia 3 Revenue Forgone 3 Current Economy Analysis 3 Current Financial Problems 4
Analysis of the Issues 4 Incremental Income 4 Opportunity Cost 4
Recommendations 4
Appendices 5 Incremental Income/Loss 5 Other Revenue 5

Executive Summary
La Centre Sheraton Hotel is located in the downtown area of Montreal. It is known as a corporate/convention hotel. It has won many awards such as the “Four Diamond Award” and the “Four Star Award”. The hotel has 824 rooms plus a prestigious five-story hotel within the hotel called the Sheraton Towers. Within the hotel it has 3 different restaurants to meet the needs of its guests. The hotel also five lounges 14 function rooms including a ballroom for banquets and receptions. Other features include a glassed-in atrium, an indoor pool, and a health club with a gymnasium, sauna, whirlpool and a masseuse.

The main decision that Georges Villedary the general director of the Le Centre Sheraton, Montreal has to make is to decide weather he should sign a one-year contract with Alitalia for 40 rooms at $42.00. Another problem that they have is regarding their cash flow. Their cash flow in regards to last fiscal year is at a deficit of $2 million and they have a long-term mortgage of $50 million. They also have a $4.2 million in municipal taxes that they have to pay.

Georges Villedary should sign the one-year contract for 40 rooms at $42.00. This will create a steady income of $5958.40 a week that will help with its cash flow problems. Creating a relationship with Alitalia would also be an intangible benefit. It may create further profits in the future.

Le Centre Sheraton, Montreal

Introduction
Georges Villedary the general director of the Le Centre Sheraton, Montreal, has to decide if he is going to sign a one-year contract with Alitalia for 40 rooms at $42 per night. A $25,000 per day crew allowance is also included in this contract. The regular rate for a room is $105.00 and last year they sold out 115 nights.
Issues and Alternatives
Accept or Refuse Contract
Georges has a week to decide if he will accept or refuse this contract. There are 10 other hotels that are competing for Alitalia’s business. He understands that if he decides to accept the proposal and satisfies their needs he will have more negotiating power when it comes to decide to renew the contract. By signing the contract he is also creating a relationship with Alitalia that could lead to long lasting business relationship.
Servicing Alitalia
If they agree to the contract they will need to deal with certain logistical issues. They will have to deal with late check-out times and have rooms cleaned immediately upon check-ins. They will roughly have 2-4 hours to clean the rooms before the next crew arrives. This means that the hotel will need to keep extra maids on duty. In addition they will need to deal with changed flight schedules, this will lead to changes in wake-up calls and the distribution of the allowances. Guests who are paying the full rate will pay these extra expenses. In other words they will lose out on revenue from full rate customers because they are compensating for the extra expenses that are incurred by Alitalia.
Revenue Forgone
From previous experiences with other airlines, crews tend to spend less during their stay at the hotel because they are usually only there for one night or if they are staying longer they tend to explore the city and spend money outside of the hotel.
They are also losing potential revenues by giving up 40 rooms for the price or $42 a night when they could be making $105 a night, plus they wouldn’t have to incur any of the extra expenses.
Current Economy Analysis
George will need to analyze the current situation in regards to the economy. If the economy is doing poorly then taking on the contract would be a good idea because it will create a steady income during the down turn but if the economy is doing well he will need to decide if it’s doing well enough to fill up all his rooms.
Current Financial Problems
Currently they are facing cash flow problems. As of the last fiscal year cash flow is at a negative $2 million and they have a $50-million long-term mortgage with a floating interest rate of $4.2 million in annual municipal taxes.
Analysis of the Issues
Incremental Income
They would have a gain of $851.20 a day if they were to sign with Alitalia. They will be paid $5958.40 every week for 52 weeks. This is good because this will create a steady income. This is also the right decision because the income outweighs the cost.
Opportunity Cost
If they decide to take the contract they are potentially giving up $12 million dollars by taking the contract they are gaining $4.8 million dollars
Recommendations
Mr. Villedary should take the contract because it guarantees him a steady income. According to their statistics the proposal will equal to 115 sold out days so they still have 250 days to sell the full rate. By having 40 rooms occupied that is only 4% of their total capacity so that still gives them plenty of rooms to sell at the full rate. Building a relationship with the company is also very important. It could very likely lead to more business.

Appendices
Incremental Income/Loss | Per Unit | Total 40 Rooms | Incremental Revenue | $42 | $1680 | Incremental Costs: Variable Costs: | | | Direct Materials: ($.75 + 1 + 2.25) | 4 | 160 | Direct Labor: ($8.60/2) + 12.42 | 16.72 | 668.8 | Total Variable Cost | $20.72 | $828.80 | Incremental Operating Income | | $851.20 |

Housekeeping - one half-hour per room. Housekeepers were paid $8.60 per hour. Laundry and linen - $.75 per occupied room.
Utilities - $1.00 per occupied room.
Amenities - $2.25 per occupied room.
Additional front desk clerk - $9.20 per hour plus fringe benefits %32 of wage = $12.42
Opportunity Cost
Take Contract - $42 * 1001 rooms * 115 days = $4,834,830
No Contract - $105 * 1001 rooms * 115 days = $12,087,075
Other Revenue | Per Unit | 40 rooms * 365 days | Food | $17 | $248,200 | Beverages | $13 | $189,800 | | | | | | |