Problem 25 nt Summers plans to purchase a proposed 100-rooms hotel fully furnish

Question

Problem 25 nt Summers plans to purchase a proposed 100-rooms hotel fully furnished. The total Bre t is $8.000,000. He believes 70 percent of the cost can be financed with a loan from he Champaign National Bank at an annual interest rate of 8 percent. The projected paid occupancy is 75 percent. Brent requires a 15 percent return on his investment after the incorporated hotel pays 30 percent 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 department are $15 for each room sold and 560,000 fixed for the year. Consider a year to have 365 days. Assume annual miscellaneous income of $10,000. Required: Determine the average price per room using the Hubbart Formula. If double rooms are sold at a premium of 20 percent over singles, what are the prices 1. 2. e a 70 percent double occupancy rate.

Explanation / Answer

1.

a.Desired Profits = Desired rate of return * Owners ivestment =$800000*15% =$120,000

b.Pre Tax Profit = Desired Profit/(1- Hotel Tax Rate) = $120,000/70% = $171,429

c.Fixed Charges and management fees: interest expense = $800000*0.7*8% = $44,800

d.Undistributed operating expense = $800,000 annually + $60000 fixed expense = $860,000

e.Estimated non room department Profit = $10,000

f.direct expense of the room = $15*75 rooms*365days = $410,625

g.room departments revenue = b+c+d+e+f =$1,496,854

h.expected rooms sold = 75*365 = 27375

i. average room rate = g/h = $57.514 = $54.68 per room per night

2. a.double occupancy rate = 70% = 70 rooms per night

full year occupancy = 70*365 = 25550

b.single occupancy = projected occupancy - projected double occupancy rate = 75-70 = 5 rooms

full year occupancy = 5*365 = 1825 days

c. let the prices for single rooms be x , prices for double rooms = 1.2x

average price =[ (x*1825) +(1.2x*25550)] / (1825+25550)

or, 54.68*27375/32485 = x

or, x = 46.08

single occupancy rate = $46.08 per room per night

double occupancy rate = 1.2*46.08 = $55.30 per room per night

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