Mountaintop golf course is planning for the coming season. Investors would like

Question

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $47,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $22,000,000 for the golfing season. About 400,000 golfers are expected each year Variable costs are about $19 per golfer. Mountaintop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf Using a cost-plus approach, what price should Mountaintop charge for a round of golf? O A. $74 O B. $88.1 OC. $131.6 OD. $19

Explanation / Answer

Answer : B. $88.1

Explanation :

Return on the company in dollors term = $47,000,000 * 12 % = $5,640,000

Total Variable cost per year = $19 per golfer * 400,000 golfers = $7,600,000

Fixed Cost (given) = $22,000,000

Total costs =  $7,600,000 +  $22,000,000 = $29,600,000

Price to be charge for a round of golf = (Total costs + Return on the company ) / No. of golfers expected

= ($29,600,000 + $5,640,000) / 400,000 = $35,240,000 / 400,000 = $88.1

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