Variable operating costs Fixed costs Salaries and wages Maintenance of building and pool Other operating and administration costs Total fixed costs $3 per room-night $177,000 38,000 190,000 $405,000 The capital invested in the motel is $1,500,000. The partnership's target return on investment is 20%. Brady 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. 1. What price should Brady charge for a room-night? What is the markup as a percentage of the full cost of a room-night? 2. Brady's market research indicates that if the price of a room-night determined in requirement 1 is reduced by 10%, the expected number of room-nights Brady could rent would increase by 10%. Should Brady reduce prices by 10%? Show your calculations. Required

Question

Cost-plus target return on investment pricing. Jason Brady is the managing partner of a business that has just nished building a 60-room motel. Brady anticipates that he will rent these rooms for 15,000 nights next year (or 15,000 roomnights). All rooms are similar and will rent for the same price. Brady estimates the following operating costs for next year:

Variable operating costs
Fixed costs
Salaries and wages
Maintenance of building and pool
Other operating and administration costs
Total fixed costs
$3 per room-night
$177,000
38,000
190,000
$405,000
The capital invested in the motel is $1,500,000. The partnership's target return on investment is 20%. Brady
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.
1. What price should Brady charge for a room-night? What is the markup as a percentage of the full cost
of a room-night?
2. Brady's market research indicates that if the price of a room-night determined in requirement 1 is
reduced by 10%, the expected number of room-nights Brady could rent would increase by 10%. Should
Brady reduce prices by 10%? Show your calculations.
Required
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Transcribed Image Text

Variable operating costs Fixed costs Salaries and wages Maintenance of building and pool Other operating and administration costs Total fixed costs $3 per room-night $177,000 38,000 190,000 $405,000 The capital invested in the motel is $1,500,000. The partnership's target return on investment is 20%. Brady 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. 1. What price should Brady charge for a room-night? What is the markup as a percentage of the full cost of a room-night? 2. Brady's market research indicates that if the price of a room-night determined in requirement 1 is reduced by 10%, the expected number of room-nights Brady could rent would increase by 10%. Should Brady reduce prices by 10%? Show your calculations. Required

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