Jason Basset is the managing partner of a business that has just finished building a 60-room motel. Basset anticipates that he will rent these rooms for

17,500 nights next year (or 17,500 room-nights). All rooms are similar and will rent for the same price. Basset estimates the following operating costs for next year:

Variable operating costs$ 3 per room-nightFixed costs Salaries and wages$165,000Maintenance of building and pool30,000Other operating and administration costs190,000Total fixed costs$385,000

The capital invested in the motel is $1,400,000. The partnership's target return on investment is 20%. Basset 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.

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

2. 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 Basset could rent would increase by 10%. Should Basset reduce prices by 10%? Show your calculations.