osts, w More Info n\'s pr Investors would like to earn a 12% return on investmen
ID: 2534665 • Letter: O
Question
osts, w More Info n's pr Investors would like to earn a 12% return on investment on the company's $111,000,000 of assets. Mountain Run projects fixed costs to be $37,000,000 for the ski season. The resort serves about 680,000 skiers and snowboarders each season. Variable costs are about $8 per guest. Last year, due to its favorable reputation, Mountain Run was a price-setter and was able to charge $2 more per lift ticket than its competitors without a reduction in the number of customers it received. ent, a per Assume that Mountain Run's reputation has diminished and other resorts in the vicinity are charging only $80 per lift ticket. Mountain Run has become a price-taker and will not be able to charge more than its competitors. At the market price, Mountain Run managers believe they will still serve 680,000 skiers and snowboarders each season. ys to Print Done 's ne.Explanation / Answer
Assume Mountain Run has found ways to cut its fixed costs to $36,320,000. What is the legal variable cost per skier/smowboarder
PART-1)
A)
Working
Revenues at market price
54,400,000
680,000 guests * $80
Less: Total Costs
42,440,000
37,000,000 + ( 680,000 guests * $8 per guest)
Operating income
11,960,000
B) Mountain Run's projected operaying income (profit) as a percent of assets amounts to 10.77%
Working: 11,960,000 / 111,000,000 = 10.77%
C) Will investors be profit with this profit level? No
Working: Since investors want to earn a 12% return on investment on the company’s assets, thus will not be happy at 10.77%
?
PART-2)
Amount
Working
Revenues at market price
54,400,000
Less: Desired profit
13,320,000
12% * 111,000,000
Target full cost
41,080,000
Less: Reduced level of Fixed costs
36,320,000
Target total variable costs
4,760,000
Divivded by number of skiers / snowboarders
680,000
Total varaible cost per skier / snowboarder
7
?
Working
Revenues at market price
54,400,000
680,000 guests * $80
Less: Total Costs
42,440,000
37,000,000 + ( 680,000 guests * $8 per guest)
Operating income
11,960,000
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