Cost-plus target return on investment pricing. John Beck is the managing partner of a partnership that has just finished building a 60-room motel. Beck 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. Beck estimates the following operating costs for next year:

Variable operating costs $3.60 per room-night Fixed costs:

Salaries and wages $210,000 Maintenance of building and pool 44,400 Other operating and administration costs 168,000 Total fixed costs $422,400 The capital invested in the motel is $1,152,000. The partnership’s target return on investment is 25%. Beck expects demand for rooms to be about 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.

Ignore any income tax effects.

Required 1. What price should Beck charge for a room-night? What is the markup as a percentage ofthe full cost of a room-night?

2. Beck’s market research indicates that ifthe price of a room-night determined in requirement 1 were reduced by 10%, the expected number of room-nights Beck could rent would increase by 10%. $hould Beck reduce prices by 10%?