=+7-20 K Cost-plus target return on investment pricing OBJECTIVE 2 Henri Dubois is the managing partner of a business that has just finished building a 60-room motel. Dubois anticipates that he will rent these rooms for 15000 room-nights next year. All rooms are similar and will rent for the same price. Dubois estimates the following operating costs for next year:

Variable operating costs $5 per room-night Fixed costs Salaries and wages $173 000 Maintenance of building and pool 52 000 Other operating and administration costs 150 000 Total fixed costs $375 000 The capital invested in the motel is $900000. The partnership’s target return on investment is 25%. Dubois expects demand for rooms to be uniform throughout the year. He plans to price the rooms at full cost plus a mark-up on full cost to earn the target return on investment.

Chapter 7: Cost management, capacity costing and capacity management 289 M07_HORN3377_02_LT_C07.indd 289 2/09/13 3:41 PM Required 1 What price should Dubois charge for a room-night? What is the mark-up as a percentage of the full cost of a room-night?