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# Josie's Place Inn - cost approaches to pricing

Josie's Place Inn, a proposed 30 rooms motel with a fully equipped restaurant, will cost \$750000 to construct.

An estimated additional \$50000 will be invested in the business as working capital.
Of the total \$800000 investment, \$400000 is to be secured from the Columbo Federal Bank at the rate of 10% interest.

The projected occupancy rate is 80% for the year.
The owners desire a 15% return on equity after the corporation pays income taxes of 25%.
The estimated undistributable expenses, not including income taxes and interest expense, total \$480000.

The estimated direct expenses of the rooms department are \$7 for each room sold.
Consider a year to have 365days.

1. Determine the average price of a room using the Hubbart Formula, assuming the contribution from the restaurant department is \$0.
2. If the double rooms are sold at a premium of \$10 over singles, what is the price of singles and double?
Assume a double occupancy rate of 40%
3. If the restaurant generates a department profit of \$20000 per year, how much may average room rates be decreased and still meet the owners' financial goals?

#### Solution Preview

1. Determine the average price of a room using the Hubbart Formula, assuming the contribution from the restaurant department is \$0.
2. If the double rooms are sold at a premium of \$10 over singles, what is the price of singles and double?
Assume a double occupancy rate of 40%
3. If the restaurant generates a department profit of \$20000 per year, how much may average room rates be decreased and still meet the owners' financial goals?

No. 1

1. Hubbart formula

Operating Costs + required return - income ex other departments = average room rate
Expected number of room nights

1. Calculate the total amount invested in the hotel.
2. Decide on the required annual rate of return on the investment.