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Answer a.:
2.5 marks
Target selling price:
Estimated sales (12,500 x ?)
?
Costs:
Variable ($10 x 12,500)
$125,000
Fixed costs
Manager salary
$
80,000
Employees wages
$150,000
Administrative costs
$
10,000
Building maintenance
$
20,000
Other fixed operative costs
$
40,000
Total fixed costs
300,000
Total costs
425,000
Desired return: 20% of $1,000,000
200,000
To earn a target return based on volume of 12,500 rooms, total revenue needs to be:
$200,000 + 425,000
= 625,000
Amount to charge per room is:
625,000/12,500 rooms = $50 per night
Alternative format
:
Target operating income = target return on investment x invested capital
Target operating income 20% of $1,000,000
$200,000
Total fixed costs (see note 1)
$300,000
Target contribution margin
$500,000
Target contribution per room (500,000 / 12,500)
$40
Add variable costs per room
$10
Price to be charged per room
$50
Proof:
Total room revenues ($50 x 12,500 rooms)
$625,000
Total costs: