14-22 Cost-plus target return on investment pricing. John Branch is the managing partner of a business that has just finished building a 60-room motel. Branch anticipates that he will rent these rooms for 16,000 nights next year (or 16,000 room-nights). All rooms are similar and will rent for the same price. Branch esti- mates 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 $4 per room-night $170,000 48,000 122,000 $340,000 The capital invested in the motel is $1,000,000. The partnership's target return on investment is 20%. Branch 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 Branch charge for a room-night? What is the markup as a percentage of the full cost of a room-night? 2. Branch's market research indicates that if the price of a room-night determined in requirement 1 is re- duced by 10%, the expected number of room-nights Branch could rent would increase by 10%. Should Branch reduce prices by 10%? Show your calculations.
14-22 Cost-plus target return on investment pricing. John Branch is the managing partner of a business that has just finished building a 60-room motel. Branch anticipates that he will rent these rooms for 16,000 nights next year (or 16,000 room-nights). All rooms are similar and will rent for the same price. Branch esti- mates 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 $4 per room-night $170,000 48,000 122,000 $340,000 The capital invested in the motel is $1,000,000. The partnership's target return on investment is 20%. Branch 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 Branch charge for a room-night? What is the markup as a percentage of the full cost of a room-night? 2. Branch's market research indicates that if the price of a room-night determined in requirement 1 is re- duced by 10%, the expected number of room-nights Branch could rent would increase by 10%. Should Branch reduce prices by 10%? Show your calculations.
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Transcribed Image Text:14-22 Cost-plus target return on investment pricing. John Branch is the managing partner of a business
that has just finished building a 60-room motel. Branch anticipates that he will rent these rooms for 16,000
nights next year (or 16,000 room-nights). All rooms are similar and will rent for the same price. Branch esti-
mates 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
$4 per room-night
$170,000
48,000
122,000
$340,000
The capital invested in the motel is $1,000,000. The partnership's target return on investment is 20%. Branch
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 Branch charge for a room-night? What is the markup as a percentage of the full
cost of a room-night?
2. Branch's market research indicates that if the price of a room-night determined in requirement 1 is re-
duced by 10%, the expected number of room-nights Branch could rent would increase by 10%. Should
Branch reduce prices by 10%? Show your calculations.
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