A city has decided to build a softball complex and the city council has already
ID: 2652499 • Letter: A
Question
A city has decided to build a softball complex and the city council has already voted to fund the project at the level of $800,000 (initial capital equipment). The city engineer has collected the following financial information for the complex project
Annual upkeep costs: $120,000
Annual utility costs: $13,000
Renovation costs: $50,000 for every five years
Annual team user fees (revenues): $32,000
Useful life: Infinite
Interest rate: 8% compounded annually
If the city can expect 35,000 visitors to the complex each year, what should be the minimum ticket price per person so that the city can break even?
Explanation / Answer
Solution:
In order to calculate minimum ticket price per person, to get the break- even, we first need to calculate the annual fixed costs of the City
Annual Fixed Cost of the City
1. Annual upkeep costs = $ 120,000
2. Annual utility costs = $ 13,000
3. Renovation costs = $ 10,000 ( since, given $ 50,000 for 5 years, $ 50,000 / 5 )
4. Annual team user fees = $ 32,000
5. Annual Interest Expense = $ 64,000 ( 8 % * $ 800,000, initial capital equipment)
Total Fixed Costs = $ 239,00
Visitors Expected each year = 35,000
Break - Even = Fixed Cost / number of visitors each year
= $ 239,000 / 35,000
= $ 6. 83 per visitor.
Therefore, to reach break - even the city need to charge minimum ticket of $ 6. 83 per visitor.
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