John Blodgett is the managing partner of a business that has just finished building a 60 room hotel. 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 opearting costs for next year.
- Variable opearting costs $5 per room night
- Fixed costs
- Salaries and wages $173,000
- Maintenance of building and pool 52,000
- Other maintanace 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.
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. Blodgetts 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 to rent would increase by 10%. Should Blodgett reduce prices by 10%? Show your calculations.