The partnerships target return on investment is 20

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Intermediate Accounting: Reporting and Analysis
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Chapter 12 / Exercise E12-6
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
The capital invested in the motel is $1,000,000. The partnership’s target return on investment is 20%. Branchexpects demand for rooms to be uniform throughout the year. He plans to price the rooms at full cost plus amarkup on full cost to earn the target return on investment.1. What price should Branch charge for a room-night? What is the markup as a percentage of thefullcost of a room-night?2. Branch’s market research indicates that if the price of a room-night determined in requirement1 isReduce by 10%, the expected number of room-nights Branch.13-21(20 min.)Cost-plus target return on investment pricing.1.Target operating income = target return on investment invested capitalTarget operating income (20% of $1,000,000)$200,000Total fixed costs340,000Target contribution margin$540,000Target contribution per room-night, ($540,000 ÷ 16,000) $33.75Add variable costs per room-night4.00Price to be charged per room-night$37.75ProofTotal room revenues ($37.75 16,000 room-nights)$604,000Total costs:Variable costs ($4 16,000)$ 64,000Fixed costs340,000Total costs404,000Operating income$200,000The full cost of a room = variable cost per room + fixed cost per roomThe full cost of a room = $4 + ($340,000 ÷ 16,000) = $4 + $21.25 = $25.25Markup per room = Rental price per room – Full cost of a room= $37.75 – $25.25 = $12.50Markup percentage as a fraction of full cost = $12.50 ÷ $25.25 = 49.5%2.If price is reduced by 10%, the number of rooms Branch could rent would increase by 10%.The new price per room would be 90% of $37.75 $ 33.975The number of rooms Branch expects to rent is 110% of 16,000 17,600The contribution margin per room would be $33.975 – $4$ 29.975Contribution margin ($29.975 17,600)$527,5609-21
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Intermediate Accounting: Reporting and Analysis
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Chapter 12 / Exercise E12-6
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
Because the contribution margin of $527,560 at the reduced price of $33.975 is less than the contribution margin of $540,000 at a price of $37.75, Branch should not reduce the price of the rooms. Note that the fixed costs of $340,000 will be the same under the $37.75 and the $33.975 price alternatives and hence, are irrelevant to the analysis.
RequiredChapter 14 1614-16 Cost allocation in hospitals, alternative allocation criteria. Dave Meltzer vacationedat Lake Tahoelast winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital.Meltzer’s insurance company received a $4,800 bill for his two-day stay. One item that caught Meltzer’sattention was an $11.52 charge for a roll of cotton. Meltzer is a salesman for Johnson & Johnson and knowsthat the cost to the hospital of the roll of cotton is between $2.20 and $3.00. He asked for a breakdown of the$11.52 charge. The accounting office of the hospital sent him the following information:Meltzer believes the overhead charge is outrageous . He comments, “There was nothing I could do about it.When they come in and dab your stitches, it’s not as if you can say, ‘Keep your cotton roll. I brought my own.’”1. Compute the overhead rate Sierra University Hospital charged on the cotton roll.

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