RATE STRUCTURE

COST RATE FORMULA

THE HUBBARt FORMULA
Rate structure
- Set of factors that a utility firm chooses in computing
consumers charges. Whereas most telephone and water
bills are quite straight forward, electricity bills can be very
complex due to inclusion of factors such as demand
charge, fuel charge, power factor penalty, time of day
billing , etc.
- The combination of all the rates offered at a hotel is
called Rate Structure. Hotel room rates are both
quantifiable and qualifiable.
- Average Daily Rate(ADR) is a term used in different
ways. In this analysis, it is used to determine a starting
point in establishing a hotel’s rate structure.
WHAT ARE THE DIFFERENT PATRS OF THE RATE STRUCTURE?
Account charge. The cost of making service available to our members. It recovers
the cost of making service available to each member.
Energy charge. Energy is the number of kilowatt-hours used by the member over
the billing period.
-This is the number of units you are used to seeing each month on your bill. Energy
charge is equal to the kilowatt-hours used multiplied by the energy rate.
KWH – One kilowatt-hour is defined as the amount of energy consumed by a 1000-watt
appliance running continuously for 1 hour.
On- peak charge. To determine the on-peak charge [traditionally known as a
demand charge], the highest one hour of energy use is identified from the on-peak
hours in each billing period. That one hour is billed at the on-peak charge per kw.
KW – One kilowatt is defined as the amount of power required to operate a 1000-watt
appliance.
Cost rate formula
Budgeted indirect-cost rate is an estimated method to allocate expenses to
units in a production batch or cost pool. The budgeted indirect cost rate formula
is calculated by dividing the budgeted annual indirect costs by the budgeted
annual quantity of the cost allocation base.
HUBBART FORMULA
 The Hubbart formula is a formula that can be used in hotel management.
It can be expressed as a formula: [(operating expenses + Desired return
on investment)-other income]/ projected room nights = room rate.
 Roy Hubbart developed a method to calculate a hotel room rate based on
the costs incurred in operating the hotel and reasonable return on
investment for the investors.
THE HUBBAART FORMULA INCORPORATES THREE DIFFERENT SECTIONS OR
SCHEDULES INTO ITS CALCULATIONS:
1. SCHEDULE I - Looks at specific financial calculations,
2. SCHEDULE II - Looks at the rates per occupied room,
3. SCHEDULE III – Incorporates square footage into the analysis.
 HUBBART FORMULA EXAMPLE – SCHEDULE I
Operating Expenses: EXAMPLE
Rooms Department $450,000
Telephone Department $75,000
Administrative and General $200,000
Payroll taxes and Employee Benefits $225,000
Advertising and Promotion $75,000
H/L/P(Heat, Light, Power) $150,000
Repairs and Maintenance $125,000
Total Operating Expense $1,300,000
Taxes and Insurance
Real Estate And Personal Property Taxes $75,000
Franchise Taxes and Fees $25,000
Insurance on Building Contents $30,000
Lease Costs (Equipment and/or Vehicles) $45,000
Total Taxes and Insurance $175,000
Depreciation at Book Value
Building $175,000
FF&E(Furniture, Fixtures and Equipment) $125,000
Total Depreciation $300,000
Fair market Return on Investment
(ROI)Property
Land
Building
FF&E
Total fair market ROI $500,000
TOTAL: $2,275,000
Deduct (income from sources other than income)
Income from store rentals/leases $25,000
Profit [loss] from food and beverage $175,000
Operations $15,000
Income from other sources (ancillary revenue) $215,000
Total Income other sources
Amount needed from room revenue to cover
Costs and realize a fair market ROI $2,060,000
HUBBART FORMULA EXAMPLE – SCHEDULE II
Example
1. Amount Needed from Guest Room $2,060,000
sales (schedule l)
2. Number of Guest Rooms Available 175
3. Number of rooms available on an annual
basis item 2 multiplied by 365(175 x 365) 100% 63,875
4. Less allowance for average vacancy - 30% -19,163
5.Numer of rooms
based on average occupancy 70% 44,712
6. Average daily rate required to cover
costs and provide reasonable ROI
(Item 1 divided by item 5) $46.07
Hubbart formula example – schedule lll
example
1. Amount needed from guest room sales $2,060,000
(schedule l)
2. Square foot area of guest rooms 70,000
3. Less allowance for average vacancy
(70,000 x 30%) -21,000
4. Net square footage of occupied rooms
(70,000 x 70%) 49,000
5. Average annual rental per square foot
(item 1 divided by item 4) $42.04
6. Average daily rental per square foot
(365 divided by item 5) $0.12