Applying the Hubbert Formula

The Hubbert formula is considered a bottom up cost approach to pricing rooms

because the first item it considers- Profit, is the bottom of the hotels income statement. The
second item- Income tax is the item up from the bottom of the income statement and so on.

Bullwhip Effect
The bullwhip effect can be explained as an occurrence detected by the supply chain
where orders sent to the manufacturer and supplier create larger variance then the sales to the
end customer. These irregular orders in the lower part of the supply chain develop to be more
distinct higher up in the supply chain. This variance can interrupt the smoothness of the
supply chain process as each link in the supply chain will over or underestimate the product
demand resulting in exaggerated fluctuations.

Some Equation Using Hubbert Formula

1. Hospitality hotel, a 200 room capacity is projected to cost Rs.9900000 inclusive land,
building, equipment and furniture. An additional Rs.100000 is needed for working
capital. The hotel is financed with the loan of Rs.7500000 at 12% annual interest, with the
owner providing cash of Rs.2500000. The owner desire a 15% annual return on
investment. A 75% occupancy is estimated, the income tax rate is 40%. The other
additional expenses are estimated as follows:-

Property tax Rs.250000

Insurance Rs.50000
Depreciation Rs.300000
Administration and general Rs.300000
Data processing cost Rs.120000
Human resources Rs.80000
Transportation Rs.40000
Marketing expenses Rs.200000
Property operation and maintenance Rs.200000
Energy cost Rs.300000

The other operated departments income or losses are estimated as follows:-

Food and Beverage Rs.150000

Telephone (Rs.50000)
Rental and other income Rs.100000
Room department payroll and related expenses Rs.150000, rooms department direct
expenses are Rs.10 per room sold.

Required:-
 Calculation of TARR as per Hubbert formula.
 Reporting and analysis.
 Findings and summary.
 Calculation of TARR as per Hubbert formula.
S.N Particular Details Amount

Step: 1 Desired profit 15% of 2500000 375000

Step: 2 Pretax profit 375000 625000
(1−0.4)

Step:3 Fixed charge and management fees 300000+ 600000

50000+250000

Step: 4 Undistributed expenses 300000+80000+ 1240000

40000+200000+
200000+300000+
120000
Step: 5 Non- room operating department 150000+100000- 200000
50000

Step: 6 Required room department income 625000+600000+ 2665000

1240000+200000

Step: 7 Room department revenue 2665000+150000+ 2817000

2000

Step: 8 TARR 2817000 18,780

150

In conclusion, the targeted average room rate is found by using hubbert formula approach. It
requires eight steps to finalize the TARR of the hotel hospitality. Step 1 where desired profit
is determined, step 2 where we can get fixed charge and management fees, undistributed
expenses in step 3, non-room operating department in step 4, required room department
income in step 6, room department in step 7 and targeted average room rate in step 8 and the
final answer of TARR is Rs.18780.
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