snowdelights operates a rocky mountain ski resort. the company is planning its l
ID: 2452859 • Letter: S
Question
snowdelights operates a rocky mountain ski resort. the company is planning its lift ticket pricing for the common ski season. investors would like to earn a 15% return on the companys 115 million of assets. the company incurs primarily fixed costs to groom the runs and operate lifts. snow delights projects fixed costs to be 43,500,000 for the ski season. the resort servces about 900,000 skiers and snowboarders each season. variable costs are 10 per guest. currently the resort has such a favorable reputation among skiers and snowbarders that it has some control over the lift ticket prices.
1. would snow delights emphasize target costing or cost plus pricing. why?
2. if other resorts in the area charge $66 per day, what price should snow delights charge?
1. snow delights should emphasie a (cost plus? or target?) approach to pricing because it has been able to differentiate its ski resort from others in the area. Because of its favorable reputation, managers will have (no? or some?) control over pricing. of couse, they still need to consider whether the (cost plus? or target?) price is within the range customers are willing to pay.
2. Complete the following table to calculate the price snowdelights should charge.
ONE OF THESE AND THE AMOUNT FOR THE TABLE
(Desired profit, Fixed costs, Number of skiers, Target Revenue, Total Costs, Total Varaible costs )
Plus: (Desired profit, Fixed costs, Number of skiers, Target Revenue, Total Costs, Total Varaible costs )
(Desired profit, Fixed costs, Number of skiers, Target Revenue, Total Costs, Total Varaible costs )
Plus: (Desired profit, Fixed costs, Number of skiers, Target Revenue, Total Costs, Total Varaible costs )
Target Revenue:
Divided by: (Desired profit, Fixed costs, Number of skiers, Target Revenue, Total Costs, Total Varaible costs )
Price per lift ticket
If other resorts in the area charge 66 per day what should we charge?
The price is ___ (above or below) competing ski resorts in the area. Given snow delights reputation they ___________ (should be able to charge 77.50 without affecting volume or wont be able to charge 77.50)
Explanation / Answer
Answer to part 1:
Given data,
Assets = 115 million
Return on assets = 15%
Fixed Costs, FC = 43500000
Number of skiers = 900000
Variable cost per guest, VC = 10
Emphasis of Snow delights on Target Costing or Cost plus pricing:
Under Cost plus pricing method, costs are measured and desired profit is added to determine the selling price.
Under Target Costing method, target cost is set by subtracting desired profit from market price.
This implies cost plus pricing is used to determine the selling price whereas target costing is used to set the target cost.
Here,
Investors would like to earn 15 % of return on its assets. Hence profit expected is known.
Based on the profit price is charged as the company has some control over prices.
This implies the company fixes selling price by adding desired profit to costs.
Hence we can say that the company emphasizes on cost plus pricing method.
Based on the above we can say that the company emphasizes on cost plus pricing
Answer to part 2:
As per the data given,
Desired Profit = 115 million * 15% = 17.25 million = 17250000
Selling price can be calculated as follows:
[(SP - VC) * Number of skiers] - FC = Desired Profit
[(SP - 10) * 900000] - 43500000 = 17250000
900000 SP - 9000000 - 43500000 = 17250000
900000 SP = 61650000
SP = 68.50
Selling price that can be charged = 68.50
When other resorts are charging only Rs. 66 per day, Sky delights need not affect its selling price becuase of its reputation in the market. Also there is only a difference of 2.50 (68.50-66) which doesnt affect the affordability of each guest individually so that the company can earn its estimated return.
Hence, the company need not affect its price.
But sky delights would not be able to charge 77.50 as it makes a lot of variantion to each guest individually. It may affect its profitability to a large extent and may not be in a position to earn its expected return.
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