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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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