Question

SnowDream operates a rocky Mountain ski resort. The company is planning its lift tickets pricing for the oming ski season. Investors would like to earn a 16% return on the company $115 million of assets. The company incurs primarily fixed costs to be 35,600,00 for the ski season. The resort serves about 800,000 skiers and snowboarders each season. Variable costs are $8 per guest. The resort had such a favorable reputation among skiers and snowboarders that it had some control over the lift ticket price.

Assume that SnowDreams reputation has diminished and other resorts in the vicinity are charging only $64 per lift tickets. SnowDream has become a price-taker and wont be able to charge more than its competitors. At the market price, snowdream managers believe they will still serve 800,000 skiers and snowboarders each season.

1. If snowdream can't reduce its costs, what profit will it earn? state your answers in dollard and as a percent of assets. Will investors be happy with the profit level? show your analysis.

complete the following table to calcuate snowdream projected income and excess profit or shortfall.(use parentheses or a minus sign to show a profit shortfall.

Revenue at market price??

Less: total costs??

operating income??

compared to the desired operating income of??

expected excess profit (profit shortfall)??

Answer 1

• All working forms part of the answer
• Working

Total Variable cost	[800,000 skiers x $8]	$         6,400,000.00
Total Fixed cost		$       35,600,000.00
Total Cost	[6400000 + 35600000]	$       42,000,000.00
Assets		$    115,000,000.00
16% return = Desired operating Income		$       18,400,000.00

• Answer

Revenues (at market price)	[800,000 skiers x $64]	$       51,200,000.00
Less: Total Cost	[see working]	$       42,000,000.00
Operating Income	[51200000 - 42000000]	$         9,200,000.00
Compared to the desired operating income of	[see working]	$       18,400,000.00
Expected excess SHORTFALL	[9200000 - 18400000]	$       (9,200,000.00)
Operating Income as a Percent of Asset	[9200000 / 115000000]	8%