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 costsFixed costsSalaries and wagesMaintenance of building and poolOther operating and administration costsTotal fixed costs$3 per room-night$177,00038,000190,000$405,000The capital invested in the motel is $1,500,000. The partnership's target return on investment is 20%. Bradyexpects demand for rooms to be uniform throughout the year. He plans to price the rooms at full cost plus amarkup 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 costof a room-night?2. Brady's market research indicates that if the price of a room-night determined in requirement 1 isreduced by 10%, the expected number of room-nights Brady could rent would increase by 10%. ShouldBrady reduce prices by 10%? Show your calculations.Required

Calculate the price for a room night and markup as a percentage of full cost of a room night.

Answered: Variable operating costs Fixed costs…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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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