Brent Sumers plans to purhcase a proposed 100-room hotel fully furnished. The to
ID: 2578169 • Letter: B
Question
Brent Sumers plans to purhcase a proposed 100-room hotel fully furnished. The total cost is $8,000,000. He believes 70% of the cost can be financed with a loan from the Champaign National Bank at an annual interest rate of 8%. The projected paid occupancy is 75%. Brent requires a 15% return on his investment after the incorporated hotel pays 30% of its pretax income as income taxes. The estimated undistributed expenses excluding income taxes and interest expense total $800,000 annually. The estimated direct expenses of the rooms departemtn are $15 for each room sold and $60,000 fixed for the year. Consider a year to have 365 days. Assume annual miscellaneous income of $10,000.
1. Determine the average price per room using the Hubbart Formula.
2. If double rooms are sold at a premium of 20% over singles, what are the prices of single and double rooms? Assume a 70% double occupancy rate.
Explanation / Answer
1. Calculation of Average price per room using Hubbart Formula
a. Calculation of Pre Tax Desired profits
Desired profits = Total Investment x Required rate of return
= $8,000,000 x 15% = $1,200,000
Pre Tax Desired Profits = 1,200,000 / (1-0.30) = $1,714,285.71
b. Calculation of fixed charges
Interest on Loan = $8,000,000 x 70% x 8% = $448,000
Fixed charges = $60,000
c. Calculation of undistributed operating expenses.
Undistributed expenses = $800,000 per year
d. Calculation of non-room operated department income.
Miscellaneous Income = $10,000
e. Calculate the required rooms department income.
Particulars
Amount
Pre Tax Desired Profits
1,714,285.71
fixed charges (448,000 + 60,000)
508,000
Undistributed operating expenses
800,000
non-room operated department income
10,000
Required rooms department income
3,032,285.71
f. Calculation of Required room revenue
Particulars
Amount
Required Rooms income
3,032,285.71
Direct Expenses of rooms
(100 rooms x 75% x $15 x 365 days)
410,625
Total required room Revenue
3,442,911
g. Calculation average price per room per day
Average price = 3,442,911 / (100 x 75% x 365 days) = $125.76
Particulars
Amount
Pre Tax Desired Profits
1,714,285.71
fixed charges (448,000 + 60,000)
508,000
Undistributed operating expenses
800,000
non-room operated department income
10,000
Required rooms department income
3,032,285.71
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