See the Winter Sports Inc. data from S8-2. Assume that Winter Sports’ reputation has diminished and other resorts in the vicinity are charging only \($65\) per lift ticket. Winter Sports has become a price-taker and won’t be able to charge more than its competitors.

At the market price, Winter Sports’ managers believe they will still serve 750,000 skiers and snowboarders each season.

1. If Winter Sports 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 Winter Sports has found ways to cut its fixed costs to \($30\) million. What is its new target variable cost per skier/snowboarder? Assume investors want to earn a 15% return on assets. Compare this to the current variable cost per skier/snowboarder.

Comment on your results.

Data From S8-2:-

Winter Sports Inc. 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. Winter Sports projects fixed costs to be \($33,750,000\) for the ski season. The resort serves 750,000 skiers and snowboarders each season. Variable costs are \($10\) per guest. Currently, the resort has such a favorable reputation among skiers and snowboarders that it has some control over the lift ticket prices.