Problem 18 The Lynn Inn, a 100-room lodging facility, is proposed for construction in the north-central part of the United States. The total cost of construction is $5,000,000. Another $200,000 is required for franchise costs and working capital purposes. Franchise costs of $100,000 are to be amortized over the first five years of operations. To simplify the problem, depreciation is calculated on a straight-line basis over 24 years (assume $200,000 of salvage value). The owners will borrow $3,000,000 at an annual interest rate of 12 percent. The owners desire an 18 percent return on their equity investment. Other unallocable costs, except for management fees, total $1,500,000 annually. Management fees are based on 3 percent of room sales Assume that gift shop department and food service department profits total $0 and $300.000, respectively. Further assume that all room department costs are variable and total 25 percent of room revenues, and that the Lynn Inn can achieve a 70 percent occupancy rate for the first year. Finally, assume an average tax rate of 25 percent Required: 1. Determine the average room rate for the Lynn Inn. 2. Assume that gift shop department losses total $50,000. How much must the average room rate be modified to cover this loss? 3. Assume (independent of # 2) that the Lynn Inn has singles, doubles, and suites. Fur- ther, the relationship between sales and prices are as follows: 434 Chapter 8 Sales Mix Price 30% ?? Singles Doubles $10 premium over singles rate 125% of doubles rate 50 20 Suites 100% Determine the average room rate for suites and doubles. Problem 18 The Lynn Inn, a 100-room lodging facility, is proposed for construction in the north-central part of the United States. The total cost of construction is $5,000,000. Another $200,000 is required for franchise costs and working capital purposes. Franchise costs of $100,000 are to be amortized over the first five years of operations. To simplify the problem, depreciation is calculated on a straight-line basis over 24 years (assume $200,000 of salvage value). The owners will borrow $3,000,000 at an annual interest rate of 12 percent. The owners desire an 18 percent return on their equity investment. Other unallocable costs, except for management fees, total $1,500,000 annually. Management fees are based on 3 percent of room sales Assume that gift shop department and food service department profits total $0 and $300.000, respectively. Further assume that all room department costs are variable and total 25 percent of room revenues, and that the Lynn Inn can achieve a 70 percent occupancy rate for the first year. Finally, assume an average tax rate of 25 percent Required: 1. Determine the average room rate for the Lynn Inn. 2. Assume that gift shop department losses total $50,000. How much must the average room rate be modified to cover this loss? 3. Assume (independent of # 2) that the Lynn Inn has singles, doubles, and suites. Fur- ther, the relationship between sales and prices are as follows: 434 Chapter 8 Sales Mix Price 30% ?? Singles Doubles $10 premium over singles rate 125% of doubles rate 50 20 Suites 100% Determine the average room rate for suites and doubles
