Problem:
Associates develops hotels in resort locations. The company is exploring the construction of a new facility that would have significant meeting and banquet space for conventions and conferences, and sleeping rooms that average 850 square feet. The accounting department estimates that land and building costs will amount to $60 and $120 per square foot of floor area, respectively. Other expenditures during construction for interest, real estate taxes, and general overhead are expected to total 35% of land and construction cost.
Once basic construction is completed, Ratner anticipates per-room initial expenditures for:
Sleeping room furnishings and accessories $16,000
Supplies 1,900
Marketing 5,500
The accounting department suggests that 10% be added to the total of all preceding costs to allow for estimation errors. Construction is anticipated to take two years.
Associates pricing policy is consistent with that of industry leaders, namely, to set a room rate equal to 1% of $1,000 of cost. Upon completion, comparable facilities are expected to charge $240 per day.
Required:
1. Compute the total cost of a sleeping room at the new facility.
2. Is the company's room rate competitive? Briefly explain.
3. Associates desires to enter this market by adhering to the industry standard and charging a competitive room rate. If needed, the firm will look for ways to cut expenditures. Briefly explain the difference between cost-plus pricing and target costing.
4. Other than operating costs and room revenues, what else should Associates consider before a final decision is made about the facility?