Concept explainers
Cost-plus target return on investment pricing. Jason Brady is the managing partner of a business that has just finished building a 60-room motel. Brady anticipates that he will rent these rooms for 15,000 nights next year (or 15,000 room-nights). All rooms are similar and will rent for the same price. Brady estimates the following operating costs for next year:
Variable operating costs | $3 per room-night |
Fixed costs | |
Salaries and wages | $177,000 |
Maintenance of building and pool | 38,000 |
Other operating and administration costs | 190,000 |
Total fixed costs | $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?
Required
- 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.
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REVEL for Horngren's Cost Accounting: A Managerial Emphasis -- Access Card (16th Edition) (What's New in Accounting)
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