Exercise $2$: Pricing using the cost approach $+$ target return on investment$\_(2$ marks$)$

A company has completed construction of a $60-$room hotel. The company manager expects to rent these rooms for $16,000$

nights in the coming year. All rooms are of equal capacity and will be rented at the same price. The company's management has

estimated the following operating costs for the coming year:

The capital invested in the hotel is $1,000,000$ and the targeted return on investment is $20.$ The company's management expects there to be a similar demand for rooms throughout the year and the company wants to use the total cost as a pricing basis when

determining the room rental price in addition to the targeted return on investment.

$\backslash$table$[[$Night $-$ room $\frac{?}{?}$$$4,$Variable operating costs$],[,$Fixed costs$],[170,000,$Wages and salaries$],[48,000,$Building and swimming pool maintenance$],[$IYY$,$ dots,Other administrative and operational costs$],[$$$340,000,$Total fixed costs$]]$

What is required?

$1-$ What is the price that the company should charge for each room night? And what is the return as a percentage of the total cost for

each room night?

$2$

$2-$ Market research indicates that if the price set in $(1)$ is reduced by $10\%,$ the number of rooms nights rented can increase by $10\%.$ Should the company reduce the price by $10\%?$ Explain the

calculations.