Question

SnowDream operates a Rocky Mountain ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to earn a 14 % return on investment on the​ company's $ 183,750,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. SnowDream projects fixed costs to be $ 33,000,000 for the ski season. The resort serves about 725,000 skiers and snowboarders each season. Variable costs are about $ 12 per guest.​ Currently, the resort has such a favorable reputation among skiers and snowboarders that it has some control over the lift ticket prices.. Assume that SnowDream's reputation has diminished and other resorts in the vicinity are charging only $ 62 per lift ticket. SnowDream has become a price-taker and won't be able to charge more than its competitors. At the market price, SnowDream's managers believe they will still serve 752,000 skiers and snowboarders each season.
A. If SnowDream can't reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets.
B. Will investors be happy with the profit level? Show your analysis.
C. Calculate SnowDream's projected income and excess profit or shortfall.

Answer 1

Answer:

company's assets = $183,750,000

expected return on investment = 14%

fixed costs = $33,000,000

number of customers = 725,000

variable costs = $12 per customer x 725,000 = $8,700,000

price per ticket = $62

total expected revenue = $62 x 725,000 = $44,950,000

A. If SnowDream can't reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets.

expected profit = total revenue - total variable costs - total fixed costs = $44,950,000 - $8,700,000 - $33,000,000 = $3,250,000

B. Will investors be happy with the profit level? Show your analysis.

expected return on investment = $3,250,000 / $183,750,000 = 1.77%, which means that investors will not be happy with the profit level.

C. Calculate SnowDream's projected income and excess profit or shortfall.

              SnowDream

              Projected Income Statement

Total revenues                         $44,950,000

- Variable costs                        ($8,700,000)

Gross profit                              $36,250,000

- Operating expenses            ($33,000,000)

Net income                                $3,250,000