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.