03_Quiz_3_Questions_and_answers - Question #1. 6.0 Marks A...

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Page 1 of 10 Question #1. 6.0 Marks A recently built hotel of 60 rooms expects to have 12,500 room-night available to generate revenues. All rooms are similar and will rent for the same price. The operating costs for the first year of operations are as follows: Variable operating costs $10 per room-night Manager’s salary $80,000 Employees’ wages $50,000 per employee Average employees needed 3 Administrative costs $10,000 Building maintenance $20,000 Other fixed operative costs $40,000 The capital invested in the hotel is 1 million. The manager’s target return on investment is 20% and he expects demand for rooms to be about uniform throughout the year. He plans to price the rooms at full cost (i.e. total costs, which are variable plus fixed) plus a markup on full cost to earn the target return on investment. Required: Show all supporting calculations in your answer. a. What price should the Manager charge for a room-night, using a capacity utilization rate of 12,500 rooms? (2.5 marks) b. The manager’s market research indicates that if the price of a room-night determined in requirement 1 was reduced by 10%, the expected number of room-nights the hotel could rent would increase by 10%. Should the manager reduce the prices by 10%? Show all computations. If you exclude any amounts in your calculations you must state why they are excluded to earn marks. (3.5 marks)
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Page 2 of 10 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:
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This note was uploaded on 03/01/2011 for the course ADMS 2510 taught by Professor Beavis during the Spring '08 term at York University.

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03_Quiz_3_Questions_and_answers - Question #1. 6.0 Marks A...

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