cost plus target return on investment pricing john blodgett is 369464

Cost plus target return on investment pricing. 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 15,000 nights next year (or 15,000 room nights). All rooms are similar and will rent for the same price. Blodgett estimates the following operating costs for next year:

Variable operating costs…………………………….$5 per room night

Fixed costs

Salaries and wages……………………………………………$173,000

Maintenance of building and pool………………………………52,000

Other operating and administration costs………………………150,000

Total fixed costs………………………………………………$375,000

The capital invested in the motel is $900,000. 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. For simplicity, ignore the time value of money.

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 10%, the expected number of room nights Blodgett could rent would increase by 10%.

Should Blodgett reduce prices by 10%? Show your calculations.