Chapter 13, Problem 13.22E

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. 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

1. 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.