Cost-plus target return on investment pricing. Jason Brady is the managing partner of a business that has just finished building a 60-room motel. Brady 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. Brady esti- mates the following operating costs for next year: Variable operating costs $3 per room-night Fixed costs Salaries and wages Maintenance of building and pool Other operating and administration costs $177,000 38,000 190,000 Total fixed costs $405,000 The capital invested in the motel is $1,500,000. The partnership's target return on investment is 20%. Brady 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.

Cornerstones of Cost Management (Cornerstones Series)
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ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
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Chapter16: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 25E
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Brady’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 Brady could rent would increase by 10%. Should Brady reduce prices by 10%? Show your calculations.

Cost-plus target return on investment pricing. Jason Brady is the managing partner of a business
that has just finished building a 60-room motel. Brady 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. Brady esti-
mates the following operating costs for next year:
Variable operating costs
$3 per room-night
Fixed costs
Salaries and wages
Maintenance of building and pool
Other operating and administration costs
$177,000
38,000
190,000
Total fixed costs
$405,000
The capital invested in the motel is $1,500,000. The partnership's target return on investment is 20%. Brady
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.
Transcribed Image Text:Cost-plus target return on investment pricing. Jason Brady is the managing partner of a business that has just finished building a 60-room motel. Brady 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. Brady esti- mates the following operating costs for next year: Variable operating costs $3 per room-night Fixed costs Salaries and wages Maintenance of building and pool Other operating and administration costs $177,000 38,000 190,000 Total fixed costs $405,000 The capital invested in the motel is $1,500,000. The partnership's target return on investment is 20%. Brady 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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