Question

Sunny Beach Resort is a family-friendly budget resort. Management has projected 14,800 room rentals for the year, based on the 60-room resort. The capital invested in the motel is $1,500,000. The target return on investment is 20%. The resort, in an effort to earn the target return on investment, plans to price the rooms at full price plus a markup.

Using data below

1. What price should Sunny Beach charge for a single room rental per night? What is the markup
   as a percentage of the full cost of a single room rental per night?
2. 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 Sunny Beach could rent would increase by 10%. Should they reduce prices by 10%? Show your calculations.

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Sunny Beach Resort is a family friendly budget resort. Management has projected 14,800 room rentals for the year based on the 60-room resort.

The capital invested in the motel is $1,500,000. The target return on investment is 20%. Sunny Beach plans to price the rooms at full cost plus a markup on full cost to earn the target return on investment.

Variable costs

$                 3.00

per rented room per night

Fixed Costs:
Wages	170,000
Cleaning and repairs	35,000
Administrative costs	190,000

Answer 1

What price should Sunny Beach charge for a single room rental per night? What is the markup
as a percentage of the full cost of a single room rental per night?

Target profit	$300,000[$1,500,000*20%]
Fixed costs	$395,000 [$170,000+35,000+190,000]
Total contribution margin required	$695,.000

Contribution margin per room night	$47[695,000/14,800]
Variable cost per room night	$3
Price to be charged	$50[47+3]

Mark up

full cost	$439,400[$14,800*3+$395,000]
profit mark up	$300,000
Percentage mark up	68.27%[$300,000/439,400]

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 Sunny Beach could rent would increase by 10%. Should they reduce prices by 1 0%

	without price reduce	10% reduce in price	change
sales	$740,000[14,800*$50]	$732,600[14,800*110%]*$50*90%
Less: variable cost	$44,400[$3*14,800]	$48,840[$3*14800*110%]
LesS: fixed costs	$395,000	$395,000
Net income	$300,600[$740,000-$44,400-395,000]	$288,760[$732,600-$48,840-395,000]	$11,840[$300,600-288,760]

No, price should not be reduced as it would reduce net income by $11,840 and also target income of $300,000 is not achieved.

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