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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