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.

Required

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.