Refer to details about Mountain Run from Short Exercise S25-2. 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.
In Short Exercise 25.2
Mountain Run 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 12% return on investment on the company’s $111,000,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. 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. Currently, the resort has such a favorable reputation among skiers and snowboarders that it has some control over the lift ticket prices.
Requirements
1. If Mountain Run cannot 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?
2. Assume Mountain Run has found ways to cut its fixed costs to $36,320,000. What is its new target variable cost per skier/snowboarder?