cost-plus target return on investment pricing. John Blodgett is the managing partner of a business that has just finished building a 60-room motel. Blodgett anticipates that he will rent these rooms for 15,000 nights next year (or 15,000 room-nights) All rooms are similar and will rent for the same price. Blodgett estimates the following operating costs for next year.

Variable operating costs $5 per room-night

Fixed costs

Salariesand wages $173,000

Maintenance of building and pool 52,000

Other operating and administration costs 150,000

Total cotd $375,000

The capital invested in the motel is $900,000. The partnership's target return on investment is 25%. Blodgett

expects demand for rooms to be uniform throughout the year. He plans to price the rooms at full cost plus a

markup on full costs to earn the target return on investment.

Required:

1. what price should Blodgett charge for a room-night? what is the markup as a percentage of the full cost

of a room-night?

2. Blodgett'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 Blodgett could rent would increase by 10%. Should

Blodgett reduce prices by 10%? Show your calculations.

Expert Answer