Question

	Problem 3.
	A proposed motel, Bruno's, is scheduled to open in two months. The owner, Lou Bruno, seeks your advice on pricing. Although he knows he will have to modify your recommendations based on market prices, he desires a cost perspective. He gives you the following information:
	Lou's investment ($)			$        9,224,000
	Lou's desired ROI (Net income)			20%
	Lou's marginal tax rate			30%
	Funds borrowed			$     13,836,000
	Interest rate			12%
	Forecasted annual costs:
	Depreciation, property taxes and insurance			$        3,689,600
	Management fees			5%	of room sales
	Rooms department expenses			25%	of room sales
	Undistributed operating expenses			$        1,475,840
	Assumptions:
	Assume the Bruno has 150 guestrooms, and it expects to have an occupancy rate of 70%. Also, assume a 365-day year in your calculations.
	Required:
	1. How much sales revenue should the motel genereate to cover all the costs and make the desired return?
	2. What sould be the ADR so that the motel can make the sales revenue found in question 1?
	3. Bruno's has both single and double rooms. Assume that 80 percent of rooms sold are double rooms, and they sell at $20 more than the price of a single room. What is the average selling price of a double?

Answer 1

1. Sales Revenue Required = (Net Income / (1 - Tax Rate)) + Interest + Depreciation + Undistributed operating expense + management fees and rooms department Fees

X = 9224000 * 20%/70% + 13836000 * 12% + 3689600 + 1475840 + 0.30X

0.70X = $9461188.57

Sales Required X = $13515983.67

2. ADR = Sales Revenue / Guest Room Occupancy * 1 / 365 = 13515983.67 / 105 * 1 / 365 = $352.67

3. Average Room sales per day = $13515983.67 / 365 = $37030.09

Number of Double rooms expected to be occupied = 150 * 70% * 80% = 84 Rooms

Number of Double rooms expected to be occupied = 150 * 70% * 30% = 21 Rooms

84 * (Y+20) + 21 * Y = 37030.09

105 Y + $1680 = 37030

Y = $336.67

Double Room Selling Price = Y + 20 = $356.67