Question

Skiable Acres operates a Rocky Mountain ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to earn a 10% return on investment on the company's $270,000,000 of assets. Skiable Acres projects fixed costs to be $31,000,000 for the ski season. The resort serves about 725,000 skiers and snowboarders each season. Variable costs are about $8 per guest. Last year, due to its favorable reputation, Skiable Acres was a price-setter and was able to charge $4 more per lift ticket than its competitors without a reduction in the number of customers it received. Assume that Skiable Acres's reputation has diminished and other resorts in the vicinity are charging only $83 per lift ticket. Skiable Acres has become a price-taker and will not be able to charge more than its competitors. At the market price, Skiable Acres managers believe they will still serve 725,000 skiers and snowboarders each season.

Requirements:

1. If Skiable Acres cannot reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?

Answer 1

Given information

Number of skiers and snowboarders = 725,000

Variable cost per guest = $9

Total variable cost = Number of skiers and snowboarders x Variable cost per guest

= 725,000 x $8

= $5,800,000

Market price = $85

Fixed costs	31,000,000
Plus: Total Variable costs	5,800,000
Total Costs	$36,800,000

 

Final answer:

revenue at market price [ 725,000 x 85 ]	$61,625,000
Less: Total costs	($ 36,800,000)
Operating income	$24,825,000

 

Will investors be happy with the profit​ level?

Invested assets = $270,000,000

Return investment = 10%

Desired profit = Invested assets x Return investment

= 270,000,000 x 10%

= $27,00,000

Investors woould not be happy because the operating income is less than desired profit.

Final answer:

revenue at market price [ 725,000 x 85 ]	$61,625,000
Less: Total costs	($ 36,800,000)
Operating income	$24,825,000