John Brown is the managing partner of a business that has just finished building a 60-room motel. Brown

anticipates that he will rent these rooms for 20,000 nights next year (or 20,000 room-nights). All rooms are similar and will rent for the same price. Brown estimates the following operating costs for next year:

Variable operating costs $ 3 per room-night

Fixed costs

Salaries and wages $173,000

Maintenance of building and pool 40,000

Other operating and administration costs 127,000

Total fixed costs $340,000

The capital invested in the motel is $1,200,000. The partnership's target return on investment is 20%.

Brown 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 Brown charge for a room-night? What is the markup as a percentage of the full cost of a room-night?
2.	Brown's market research indicates that if the price of a room-night determined in Requirement 1 is reduced by 15%, the expected number of room-nights Brown could rent would increase by 10%. Should Brown reduce prices by 15%? Show your calculations.