a) Identify the sunk, incremental and unavoidable costs in the above scenario

a.       Sunk costs – Original cost of the hotel

b.      Incremental costs – Variable costs

c.       Unavoidable costs – Fixed costs

b) Advise Gerry and Debra whether or not they should take up the offer from the tour company.

 In this question the focus must be only on the incremental costs and revenues that occur as a result of a decision to accept or reject the order.

If the business accepts the order the relevant costs and revenues are as follows.

By accepting the order the business will generate €10,000 extra profit. Gerry and Debra must be mindful of the qualitative factors that may affect this decision such as the dates when the tour operator will require the rooms. If this is during any peak business periods the business may lose out on existing sales. Also management need to be mindful of the fact that based on their normal price they would only need to sell and extra 500 bed-nights (€10,000 / 40-20) to achieve this extra €10,000 profit. This would amount to an occupancy level of 79%. Whether this is likely or not is debatable.