Radner and Associates Develops Hotels in Resort Locations The Accounting Department Suggests That 10% Be Added to the Is

question 33

Essay

Radner and Associates develops hotels in resort locations. The company is exploring the construction of a new facility that would have significant meeting and banquet space for conventions and conferences, and sleeping rooms that average 850 square feet. The accounting department estimates that land and building costs will amount to $60 and $120 per square foot of floor area, respectively. Other expenditures during construction for interest, real estate taxes, and general overhead are expected to total 35% of land and construction cost.
Once basic construction is completed, Radner anticipates per-room initial expenditures for: $\begin{array}{lr}\text { Sleeping room furnishings and accessories } & \$ 16,000 \\\text { Supplies } & 1,900 \\\text { Marketing } & 5,500\end{array}$
The accounting department suggests that 10% be added to the total of all preceding costs to allow for estimation errors. Construction is anticipated to take two years.
Radner's pricing policy is consistent with that of industry leaders, namely, to set a room rate equal to .1% (.001) of cost. Upon completion, comparable facilities are expected to charge $240 per day.
Required:
A. Compute the total cost of a sleeping room at the new facility.
B. Is the company's room rate competitive? Briefly explain.
C. Radner desires to enter this market by adhering to the industry standard and charging a competitive room rate. If needed, the firm will look for ways to cut expenditures. Briefly explain the difference between cost-plus pricing and target costing.
D. Other than operating costs and room revenues, what else should Radner consider before a final decision is made about the facility?

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Definitions:

Plant Assets

Fixed assets that are tangible in nature, such as buildings and machinery, used in the operations of a business and expected to be useful for many years.

Profit Margin

A measure of a company's profitability, typically defined as net income divided by revenue, and expressed as a percentage.

Investment Turnover

A component of the rate of return on investment, computed as the ratio of sales to invested assets.

Return on Investment

A measure used to evaluate the efficiency of an investment, calculated by dividing the profit gained on an investment by the cost of the investment.