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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?

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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.
3. Estimate the overhead expenses.
4. Combine 2 and 3 to find the required gross operating income.
5. Estimate the probable profits from all other sources.
6. Deduct 5 from 4 to find out how much profit you need to make from room ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to determine the average price of a room using the Hubbart Formula, assuming the contribution from the restaurant department is $0, the price of singles and double, and how much may average room rates be decreased and still meet the owners' financial goals if the restaurant generates a department profit of $20000 per year.

$2.19