Question

Mount Snow operates a mountain ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to earn a 16% return on the company’s $109 375 000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. Mount Snow projects fixed costs to be $35 000 000 for the ski season. The resort serves about 700 000 skiers and snowboarders each season. Variable costs are about $12 per guest. Currently, the resort has such a favourable reputation among skiers and snowboarders that it has some control over the lift ticket prices.

Required

1. Would Mount Snow emphasise target pricing or cost-plus pricing. Why?
2. If other resorts in the area charge $83 per day, what price should Mount Snow charge?

Answer 1

a) Mount snow emphasis a cost plus pricing strategy. Because the investors like to earn 16% return the company's asset over the total cost. and it also have a favourable reputation among skiers and snowboarders. so it has some control over the ticket price. If it does not have any control over the price it should go for target pricing based on the other resort chare.

b) Expected profit = 16% of company's asset

= $109375000*16% = $ 17500000

Number of guest    = 700000

Fixed cost    = $ 35000000

  variable cost = 700000*12 = $ 8400000

Total cost = 35000000+8400000 = $ 43400000

Add : profit = $ 17500000

total expected return = 43400000+17500000 = $ 60900000

Expected price per unit = 60900000/700000 = 87/day

SInce all the other resorts are charging 83 per day , mount snow can fix there price between 83 and 87. based on howmuch return they want. If they need 16% on total asset they have to charge $ 87.