Variable operating costs $3 per room-night Fixed costs Salaries and wages Maintenance of building and pool $177,000 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. What price should Brady charge for a room-night? What is the markup as a percentage of the full cost of a room-night? 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 1. 2.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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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
Maintenance of building and pool
$177,000
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.
What price should Brady charge for a room-night? What is the markup as a percentage of the full cost
of a room-night?
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
1.
2.
Transcribed Image Text:Variable operating costs $3 per room-night Fixed costs Salaries and wages Maintenance of building and pool $177,000 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. What price should Brady charge for a room-night? What is the markup as a percentage of the full cost of a room-night? 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 1. 2.
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