A 100 room hotel is projected to cost $5,000,000 plus $200,000 in franchise costs and working capital. Franchise costs of $100,000 will be amortized over the first 5 years of business. Depreciation is calculated in the straight-line method over 24 years with a salvage value of $200,000.
The owners will borrow $3,000,000 at 12% interest and they desire an 18% return on their investment. Other un- allocable, except for management fees, total $1,500,000 annually, management fees are 3% of room sales.
The telephone department breaks even and the F&B department has a profit of $300,000 per year. All the room department’s costs are variable at 25% of room revenues. The hotel is expected to reach a 70% occupancy in the first year and the tax rate is 25%.
1. Determine the average room rate for the hotel using the bottom up approach.
2. What average room rate is required if the telephone department has a loss of $50,000.
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