# How to Calculate your Hotel Room Rate?

##### 1. Total costs:

Bank loan (£250,000 @ 9%) 22,500

Depreciation 40,000

Other fixed costs 65,000

Operating expenses 85,000

Total costs 212,500

After-tax profit sought by owners = £450,000 × 0.15 = £67,500.

Before-tax profit needed to provide after-tax profit of £67,500 =£135,000 (tax is 50%).

Total revenue needed to provide before tax profit of £135,000 =

Total costs + desired before-tax profit, i.e. £212,500 + £135,000 = £347,500

Room rate = Total revenue ÷ Room nights sold in a year

Room nights sold in a year = 40 × 0.55 × 365 = 8,030

Room rate = £347,500 ÷ 8,030 = £43.27

##### 2. (a) Profit = Revenue – Variable costs – Fixed costs

Contribution = Revenue – Variable costs

In this problem Variable costs are 75% of Revenue,

• Contribution = 25% of Revenue

We can therefore say:

Target profit = 0.25 of Revenue – Fixed costs, or:

50% of \$120,000 = 0.25R – (\$55,000 + \$8,000 + \$30,000 + \$5,000 + \$6,000 + \$4,000 + \$28,000)

\$60,000 + \$136,000 = 0.25R,

\$196,000 ÷ 0.25 = R

R = \$784,000

Answer: Total revenue of \$784,000 will provide a 50% before-tax return on the owners’ investment of \$120,000.

(b) Total number of weekdays restaurant is open = 49 × 4 = 196.

Total number of weekday covers sold = 196 × 50 × 2 = 19,600.

Total number of Saturdays and Sundays restaurant is open = 49 × 2 = 98.

Total number of weekend covers sold per annum = 98 × 50 × 3 = 14,700

Total number of covers sold per annum = 19,600 + 14,700 = 34,300

• average selling price per cover to provide target profit = \$784,000 ÷ 34,300 = \$22.86
##### 3. (a) Total investment in rooms = \$12,600,000 (70% of \$18 m).

Average room investment = \$140,000 (\$12.6 m ÷ 90).

Average room rate = \$140 (\$140,000 ÷ 1,000).

(b) Revenue required per day = \$3,066,000/365 = \$8,400

Let M represent price charged per square metre.

(21 × 60M) + (21 × 80M) + (21 × 110M) = \$8,400

1,260 M + 1,680M + 2,310M = \$8,400

5,250M = \$8,400

M = \$1.6

For the economy rooms the rate should be: \$1.6 × 60 = \$96.

For the double rooms the rate should be: \$1.6 × 80 = \$128.

For the deluxe rooms the rate should be: \$1.6 × 110 = \$176.