Question: John Branch is the managing partner of a business that

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 estimates the following operating costs for next year:
Variable operating costs ............. $ 4 per room-night
Fixed costs
Salaries and wages ............... $ 170,000
Maintenance of building and pool ......... 48,000
Other operating and administration costs ....... 122,000
Total fixed costs ............... $ 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 reduced 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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  • CreatedMay 14, 2014
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