The General Manager of the recently opened 30 room Taj Mahal Hotel has developed the following projected operating costs for the forthcoming year:
$\begin{array}{l}
\text { Fixed costs: }\
\begin{array} { l r }
\text { Salaries and wages } & \$ 250,000 \
\text { Maintenance } & 60,000 \
\text { Other costs } & \underline { 110,000 } \
\text { otal fixed costs } & \underline{\underline { \$ 420,000 }}
\end{array}
\end{array}$ The General Manager believes that if rooms are priced in the range of $100-$90, 10,000 room nights will be sold next year. All rooms are to be priced at the same rate. Capital invested in the hotel is $2,000,000 and the General Manager's target return on investment is 25%. In order to achieve this target rate of return, what price should be charged per room night sold?

Question

The General Manager of the recently opened 30 room Taj Mahal Hotel has developed the following projected operating costs for the forthcoming year:
$\begin{array}{l}
\text { Fixed costs: }\
\begin{array} { l r } 
\text { Salaries and wages } & \$ 250,000 \
\text { Maintenance } & 60,000 \
\text { Other costs } & \underline { 110,000 } \
\text { otal fixed costs } & \underline{\underline { \$ 420,000 }}
\end{array}
\end{array}$ The General Manager believes that if rooms are priced in the range of $100-$90, 10,000 room nights will be sold next year. All rooms are to be priced at the same rate. Capital invested in the hotel is $2,000,000 and the General Manager's target return on investment is 25%. In order to achieve this target rate of return, what price should be charged per room night sold?

Quizplus · Accepted Answer

The total projected operating expenses for the year are $1,000,000. To calculate the required revenue to achieve a 25% return on investment, we need to add 25% of the capital invested ($2,000,000 x 0.25 = $500,000) to the total operating expenses ($1,000,000 + $500,000 = $1,500,000).

To calculate the price per room night, we divide the required revenue by the projected number of room nights sold: $1,500,000 ÷ 10,000 = $150.

However, we need to charge a price in the range of $100-$90, so we need to lower the price. The closest option is $99, which will give us a revenue of $990,000 ($99 x 10,000 room nights), plus an additional $495,000 in profit ($2,000,000 x 0.25). This will give us a total revenue of $1,485,000, which is close enough to our required revenue of $1,500,000. Therefore, B is the best choice.

The General Manager of the Recently Opened 30 Room Taj