Question

In: Accounting

Tar Heel Travel Agency has purchased 5,000 tickets to the “Almost-A-Bowl” game which will host the...

Tar Heel Travel Agency has purchased 5,000 tickets to the “Almost-A-Bowl” game which will host the Tarheels in December.   The company’s trip planners are suggesting three levels of service for their bowl travel packages: Premium, Value, and Cheap-Cheap. They have determined the following potential customer segments are interested in purchasing these packages:

·      Die-Hard Fans (1,500 maximum travelers)

·      Fair Weather Fans (3,000 maximum travelers)

·      Students (500 maximum travelers)

Further, assume for simplicity that:

·      Maximum willingness to pay (price) for each segment and package marginal costs are presented in table below.

·      There are no additional costs of market development.

·      There are no fixed costs incurred for setting up each package class.

·      Assume that segments that receive zero surplus, still will buy the ticket.

·      If customers get the same surplus from two fare classes, they will buy the higher class of service.

The trip planners are considering three levels of service for their bowl travel packages as follows:

Premium

Value

Cheap-Cheap

Marginal Cost = $4,000

Marginal Cost = $1,250

Marginal Cost = $200

Your Price: $_________

Your Price: $_________

Your Price: $_________

Segments

Maximum willingness to pay

Surplus

Maximum willingness to pay

Surplus

Maximum willingness to pay

Surplus

Die-Hard

$10,000

$4,000

$750

Fair Weather

$5,500

$3,500

$550

Students

$4,400

$2,000

$500

a) What is the best price point for each class of ticket in order to maximize revenue?

Optimal Price Point Premium Package to maximize revenue: $     ____   .

Maximum Revenue for Premium Package: $      ____     Million

Optimal Price Point for Value Package to maximize revenue: $ ____      .

Maximum Revenue for Value Package: $       ____    Million

Optimal Price Point for Cheap-Cheap Package to maximize revenue: $ ______      .

Maximum Revenue for Cheap-Cheap Package: $       ____    Million

b) What is the best price point for each class of ticket in order to maximize profit (package costs are provided in the table above)?

Optimal Price Point Premium Package to maximize profit: $     ____   .

Maximum Profit for Premium Package: $      ____     Million

Optimal Price Point for Value Package to maximize profit: $ ____      .

Maximum Profit for Value Package: $       ____    Million

Optimal Price Point for Cheap-Cheap Package to maximize profit: $ ______      .

Maximum Profit for Cheap-Cheap Package: $       ____    Million

c) Without making any calculations, what suggestions do you have to allow the travel agency to increase its profits over what you presented in part (b)? What do you have to be concerned about when determining the correct pricing for the various options?

Solutions

Expert Solution

MAXIMUM OPTIMAL MAXIMUM OPTIMAL MAXIMUM OPTIMAL
Die hard Die hard Fair Fair Student Student
marginal cost 1500 1500 3000 3000 500 500
Premium 4000 10000 6000 5500 1500 4400 400
value 1250 4000 2750 3500 2250 2000 750
cheap-cheap 200 750 550 550 350 500 300
Premium 15,000,000 9,000,000 16,500,000 4,500,000 2,200,000 200,000
value     6,000,000 4,125,000 10,500,000 6,750,000 1,000,000 375,000
cheap-cheap     1,125,000      825,000     1,650,000 1,050,000      250,000 150,000
A) what is the best price point for each class of ticket in order to maximise revenue
1) Optimal price point premium package to maximise revenue $ 5,500
2) maximum revenue for premium package : $ 16,500,000
1) Optimal price point Vaue package to maximise revenue $ 3500
2) maximum revenue for value package : $ 10,500,000
1) Optimal price point Cheap -Cheap package to maximise revenue $550
2) maximum revenue for Cheap-cheap package : $ 1,650,000
B) what is the best price point for each class of ticket in order to maximise profit $ 10,000
1) Optimal price point premium package to maximise profit $ 10,000
2) maximum profit for premium package : $ 9,000,000
1) Optimal price point Vaue package to maximise profit $ 3500
2) maximum profit for value package : $ 6,750,000
1) Optimal price point Cheap -Cheap package to maximise profit $ 550
2) maximum profit for Cheap-cheap package : $ 1,050,000
1 its pricing should be based on fair weather fans as they bring the optium profits except for premium segment where it should be for die hard travellers
2 the affordability of the travellars needs to be kept in mind before determining the pricing

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