Posted: May 16th, 2016

Calculate the expected opportunity loss per night sustained by The Endless Point Rest

Emmet has estimates that every no show is a loss if $73 per room per night. So he makes a deal with Billy-Bob, the manager of Lucky Zest resort. “Billy-Bob, take our walks and we’ll pay the charge. I know your rack rate is $230 a night – what about we pay you $90 a room per night for getting our free business? We’ll never walk more than 12 to you any one night.”
Billy-Bob knows a good deal when he hears it. “Ok, covers our variable costs easy – and we always got rooms – you’ve got a contract.”
Emmet knows the loss from a walk is more than just paying the cost of Billy-Bob’s resort room. Even though the walked customer will have already paid The Endless Point Rest (for the unavailable room), Emmet estimates the additional cost (loss of good will, loss of additional services) to be $110 per walked guest.
Tasks: (Total 100 marks)
1. Calculate the expected opportunity loss per night sustained by The Endless Point Rest. (15 marks)
2. Calculate the number of rooms to be overbooked by The Endless Point Rest to minimise the expected loss in the long run (maximum 12 no shows and assume guest length of stay is one night). What is the expected average gain per night from overbooking? Show all workings. (30 marks)
3. Apply the critical fractile criterion decision rule to verify your answer to task 2. Does this confirm or contradict the result for Part 2? Why is this? Explain in plain English what the critical fractile actually indicates with regard to its interpretation. (15 marks)
4. Prepare a 50 word (maximum) script to be used by staff when walking a family (i.e., how staff explain to disgruntled families a room is not available). What other measures may be used or implemented by the Endless Point Rest to support this overbooking strategy? (40 marks)