Consider SnowDreams from S8-3. Assume that SnowDreams’ reputation has diminished and other resorts in the vicinity are charging only $65 per lift ticket. SnowDreams has become a price-taker and won’t be able to charge more than its competitors. At the market price, SnowDreams’ managers believe they will still serve 750,000 skiers and snowboarders each season.
In S SnowDreams 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 15% return on the company’s $100 million of assets. The company incurs primarily fixed costs to groom the runs and operate the lifts. SnowDreams projects fixed costs to be $33,750,000 for the ski season. The resort serves about 750,000 skiers and snowboarders each season. Variable costs are about $10 per guest. Currently, the resort has such a favourable reputation among skiers and snowboarders that it has some control over the lift-ticket prices.
1. If SnowDreams can’t reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level? Show your analysis.
2. Assume that SnowDreams has found ways to cut its fixed costs to $30 million. What is its new target variable cost per skier/snowboarder? Compare this to the current variable cost per skier/snowboarder. Comment on your results.