John Bilodeau is the managing partner of a business that has just finished building a 60-room motel. Bilodeau anticipates that he will rent these rooms for 12,000 nights next year (or 12,000

room-nights). All rooms are similar and will rent for the same price. Bilodeau estimates the following operating costs for next year:

The capital invested in the motel is $1,040,000. The partnership's target return on investment is 30%.

Bilodeau 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.

Requirements

1.	What price should Bilodeau charge for a room-night? What is the markup as a percentage of the full cost of a room-night?
2.	Bilodeau's market research indicates that if the price of a room-night determined in requirement 1 is reduced by 55%, the expected number of room-nights Bilodeau could rent would increase by 55%. Should Bilodeau reduce prices by 55%? Show your calculations.
Variable operating costs			$ 3 per room night
Fixed costs
Salaries and wages			$170,000
Maintenance of building and pool			52,000
Other operating and administration costs			222,000
Total fixed costs			$444,000

$444,000