Question 4.1

Hotel+ is considering building a budget hotel that offers clean small rooms with bathrooms. The company anticipates that 120 rooms will rent for 39,600 room-nights per year. The market price for equivalent rooms is $60 per night. Hotel+ estimates that the capital cost will be $6,500,000 and the company would like an annual return of 10%. Following are the estimated annual operating costs:

Variable operating costs	$ 21 per room night
Fixed costs:
Salaries and wages	$ 420,000
Building maintenance	89,000
General administration	280,000
Total fixed costs	$ 789,000

Required

1. What is the full cost per room-night?
2. Can Hotel+ meet the targeted return on investment based on the estimated costs and revenue? Show your calculations.
3. A tour operator has offered $30 per night for 20 rooms during a time of the year that there is likely to be at least that many rooms vacant. Should Hotel+ accept this offer? Show your calculations.

Question 4.2

The Blue Jays are evaluating ticket prices for its baseball games. Studies show that Friday and Saturday night games average more than twice the fans of games on other days. The following information pertains to the stadium's normal operations per season:

Average fans per game (all games)	2,500 fans
Average fans per Friday and Saturday night games	3,500 fans
Number of home games per season	30 games
Stadium capacity	3,500 seats
Variable operating costs per operating hour	$2,000
Marketing costs per season for basketball	$138,750
Customer-service costs per season for basketball	$25,000

The stadium is open for 5 operating hours on each day a game is played. All employees work by the hour except for the administrators. A maximum of one game is played per day and each fan has only one ticket per game.

Required

1. What is the unit cost when establishing a long-run price for ball games assuming all tickets are priced the same?

Question 4.3

Lemon Lime Ltd. forecast sales of 42,000 units and production of 40,000 units. Other budget information related to the company for the year included:

Direct manufacturing labour	$171,900
Variable manufacturing overhead	83,500
Direct materials	52,300
Variable selling expenses	23,000
Fixed administrative expenses	190,000
Fixed manufacturing overhead	240,000

The standard costs remained the same as in the previous year.

Lemon Lime Ltd. is considering various cost bases. The company management require a 15% return on an investment of $2,500,000. The company wants this cost built into all cost base options.

Required

1. Compute the cost-plus price per unit using direct costing.
2. Compute the cost-plus price per unit using absorption costing.
3. Compute the cost-plus price per unit using the full product cost.

Question 4.4

Celebration Greeting Cards Incorporated is starting a new business venture and are in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows:

• Sixteen times each year, a new card design will be put into production. Each new design will require $600 in setup costs.
• The parchment grade card product line incurred $75,000 in development costs and is expected to be produced over the next four years.
• Direct costs of producing the designs average $0.50 each.
• Indirect manufacturing costs are estimated at $50,000 per year.
• Customer service expenses average $0.10 per card.
• Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50.
• Sales units equal production units each year.

Required

1. What are the estimated life-cycle revenues?
2. What is the estimated life-cycle operating income if the product life cycle is one year?
3. What is the estimated life-cycle operating income per year for the years after the first year if all of the development costs are charged to the first year?
4. What is the total estimated life-cycle operating income?