John Brown is the managing partner of a business that has just finished building a 60-room motel. Brown anticipates that he will rent these rooms for 20,000 nights next year (or 20,000 room-nights). All rooms are similar and will rent for the same price. Brown estimates the following operating costs for next year: Variable operating costs $ 3 per room-night Fixed costs Salaries and wages $173,000 Maintenance of building and pool 40,000 Other operating and administration costs 127,000 Total fixed costs $340,000 The capital invested in the motel is $1,200,000. The partnership's target return on investment is 20%. Brown expects demand for rooms to be uniform throughout the year. He plans to price the rooms at full cost plus a markup on full cost to earn the target return on investment. Requirements 1. What price should Brown charge for a room-night? What is the markup as a percentage of the full cost of a room-night? 2. Brown's market research indicates that if the price of a room-night determined in Requirement 1 is reduced by 15%, the expected number of room-nights Brown could rent would increase by 10%. Should Brown reduce prices by 15%? Show your calculations.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
John Brown is the managing partner of a business that has just finished building a 60-room motel. Brown
anticipates that he will rent these rooms for 20,000 nights next year (or 20,000 room-nights). All rooms are similar and will rent for the same price. Brown estimates the following operating costs for next year:
Variable operating costs $ 3 per room-night
Fixed costs
Salaries and wages $173,000
Maintenance of building and pool 40,000
Other operating and administration costs 127,000
Total fixed costs $340,000
The capital invested in the motel is $1,200,000. The
Brown expects demand for rooms to be uniform throughout the year. He plans to price the rooms at full cost plus a markup on full cost to earn the target return on investment.
Requirements
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1. |
What price should Brown charge for a room-night? What is the markup as a percentage of the full cost of a room-night? |
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2. |
Brown's |
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