cost plus target return on investment pricing john beck is 268182

Cost plus target return on investment pricing. John Beck is the managing partner of a business that has just finished building a 60 room motel. Beck anticipates that he will rent these rooms for 16,000 nights next year (or 16,000 room nights). All rooms are similar and will rent for the same price. Beck estimates the following operating costs for next year:



The capital invested in the motel is $1,000,000. The partnership’s target return on investment is 25%. Beck 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 Beck charge for a room night? What is the markup as a percentage of the full cost of a room night?

2. Beck’s 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 Beck could rent would increase by 10%. Should Beck reduce prices by 10%? Show yourcalculations.