Question

Stonebridge golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $40 million of assets.

About 300,000 golfers are expected each year.

At that activity level, the total of variable and fixed costs is $20,000,000.

The company has some pricing power. Using a cost-plus approach, what price should Stonebridge charge for a round of golf so that investors get their 12% return?

Answer 1

Answer)

Calculation of selling price per unit that should be charged in order to get 12% return on investment

Price for each round of golf = (total cost + target return on investment)/ number of rounds of golf

                                      = ($ 20,000,000 + $ 4,800,000)/ 300,000 rounds of golf

                                      = $ 82.67 per unit (rounded off)

Therefore price that should be charged for a round of golf in order to have a 12% return on investment is $ 82.67.               

Working Note:

Calculation of target return on investment

Target return on investment = Investment in Assets X Percentage of target return on investment

                                                     = $ 40,000,000 X 12%

                                                     = $ 4,800,000