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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
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 14,500 nights next year (or 14,500 room-nights). All rooms are similar and will rent for the same price. Blodgett estimates the following operating costs for next year: (Click the icon to view the operating costs.) (Click the icon to view the additional information.) 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 5%, the expected number of room-nights Blodgett could rent would increase by 10%. Should Blodgett reduce prices by 5%? Show your calculations. Requirement 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? Begin by selecting the formula. Then enter the amounts and solve for the room price per night. (Round your answers to the nearest cent.) Price per room-night per room-night What is the markup as a percentage of the full cost of a room-night? (Round each value in the formula to three decimal places. Enter the markup as a percentage rounded to two decimals.) ) x 100 = Markup as a % of full cost ) x 100 = % markup Requirement 2. Blodgett's market research indicates that if the price of a room-night determined in requirement 1 is reduced by 5%, the expected number of room-nights Blodgett could rent would increase by 10%. Should Blodgett reduce prices by 5%? Show your calculations. Begin by calculating the new contribution margin, which will help you make your decision. Select the formula first, and then enter the amounts to calculate the contribution margin. (Round the new price per room to the nearest cent. Round the contribution margin to the nearest dollar.) = New contribution margin ) x Should Blodgett reduce prices by 5%? (Round your answers to the nearest whole dollar.) Because the contribution margin of $ at the reduced price is the original contribution margin of $ at the selling price calculated in requirement 1, Blodgett reduce the price of the rooms. $ Variable operating costs $7 per room-night Fixed costs Salaries and wages 173,000 Maintenance of building and pool 60,000 Other operating and administration costs 145,000 $ Total fixed costs 378,000 The capital invested in the motel is $1,050,000. 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 cost to earn the target return on investment
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