Establishing Room Rates

1) Amir Din Hotel Sdn.Bhd. is considering building a 150 room hotel at a city centre

location. The estimated building costs are RM 5,000,000, the fitting out costs RM

2,000,000 and the working capital required RM 500,000. The project will be financed by

borrowing RM 6,000,000 at 15% per annum and providing the remainder from internal

sources. Investment Hotels expect an overall return of 15%. Tax is currently charged at

30% on profit. The annual operating expenses are estimated to be RM 2,500,000, the

food and beverage contribution to be at RM 400,000 and the room servicing costs to be

RM 300,000. The hotel will be open all year round ant the average occupancy rate is

expected to be 75%. Calculate the average room rate using the bottom-up approach.

2) Hotel Tatak Untung Sdn. Bhd. Have constructed a 300 bedroom hotel at a cost of RM

8,000,000. The hotel requires a working capital of RM 750,000. The hotel is being wholly

financed by John Smith, who is expecting a return of investment of 25% in the first year

of operation. Tax is currently charged at 35% on profit. The annual operating expenses

are estimated to be RM 3,000,000. During the first year of operation we can expect to

make loss of RM 50,000 in the food and beverage department. The hotel will be closed

during the months of January and February (calculate 60 days) and expects an average

occupancy rate 80%. Calculate the average room rate using:

a) The rule-of-thumb approach

b) The bottom-up approach

Answer

1) Bottom-up Approach ( Hubbart Formula)

Investment

Building costs RM 5, 000, 000

Fitting Out Costs RM 2, 000, 000

Working Capital RM 500, 000 RM 7, 500, 000

Annual Operating Expenses RM 2, 500, 000

Return on Investment

(15% x RM 6, 000, 000) RM 900, 000

Tax (30%)

( RM 7,500,000 x 15%) x 30% RM 482, 142.90 RM 3,882, 142.90

1 – 0.3 RM 11,382,142.90

Contributory income

Food & Beverage RM 400, 000

Room servicing cost RM 300, 000 (RM 700, 000)

Total cost RM 10,682,142.90

Schedule II: The Hubbart Formula for determining Room Rates

1) Amount required from guest Room sales per

Schedule I RM 10,682,142.90

2) Number of room available 150

3) Number of available rooms on an annual basis

(365 days x 150 rooms) 54,750 100%

4) Less: allowance for average vacancies 13,687.50 25%

5) Number of occupied room based on estimated

Occupancy percentage 41,062.50 75%

6) Average daily rate required to generate desired

Income RM 260.14
 2(a). Rule-up-thumb

1) 300 bedroom hotel = RM 8,000,000 ÷ 300

= RM 26,666.66667 cost per room

Using the $1.00 per $1,000 formula

2) The average room rate =RM 26,666.66667 ÷ $ 1,000

= RM 26.67
2(b). The bottom up approach (Hubbart Formula)

Investment

Building costs RM 8, 000, 000

Working Capital RM 750, 000 RM 8, 750, 000

Annual Operating Expenses RM 3,000, 000

Return on Investment

(25% x RM 8, 750, 000) RM 2, 187, 500

Tax (35%)

(RM 8,750,000 x 25%) x 35% RM 1,177,884.62 RM 6,365,384.62

1 – 0.35 RM 15,115,384.62

Contributory income

Food & Beverage (RM 50, 000)

Total cost RM 15,065,384.62

Schedule II: The Hubbart Formula for determining Room Rates

1) Amount required from guest Room sales per

Schedule I RM 15,065,384.62

2) Number of room available 300

3) Number of available rooms on an annual basis

[(365 days – 60 days) x 300 rooms] 91,500 100%

4) Less: allowance for average vacancies 18,300 20%

5) Number of occupied room based on estimated

Occupancy percentage 73,200 80%

6) Average daily rate required to generate desired

Income RM 205.81