1. Winter Paradise Inc. operates a Rocky Mountain ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to eam 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 Paradise 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. The resort had such a favorable reputation among skiers and snowboarders that it had some control over the lift ticket prices Assume that Winter Paradise's reputation has diminished and other resorts in the vicinity are charging only $65 per lift ticket. Winter Paradise has become a price-taker and won't be able to charge more than its competitors. At the market price, Winter Paradise's managers believe they will still serve 750,000 skiers and snowboarders each season Read the requirements 1. If Winter Paradise 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 Complete the following table to calculate Winter Paradise's projected income and excess profit or shortfall. (Use parentheses or a minus sign to show a profit shortfall.) Revenue at market price Less: Total costs Operating income Compared to the desired operating income of Expected excess profit (profit shortfall) (Round the percentage to the nearest hundredth percent, X.XX%) As a percentage of assets. Winter Paradise's projected profit is Will investors be happy with this profit level? (1) Stock prices (2) 2. Assume that Winter Paradise 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. Complete the following table to calculate Winter Paradise's new target variable cost per customer. (Round your final answer to the nearest cent.) (3) Less: (5) Less: (6) Target total variable costs Divided by: Target variable cost per skier / snowboarder This target variable cost is (8) current variable cost the current variable cost of $10. Winter Paradise (9) this target since it is (10) the 1: Requirements 1. If Winter Paradise 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 Paradise 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 eam a 15% return on assets. Compare this to the current variable cost per skierisnowboarder. Comment on your results. (1) No, because the expected return on assets is greater than the desired return on assets. (2) may decline as a result No, because the expected return on assets is less than the desired return on assets. may increase as a result Yes, because the expected return on assets is greater than the desired return on assets. Yes, because the expected return on assets is less than the desired return on assets. (3) O Revenue at market price (4) O Revenue at market price Desired profit Target revenue Desired profit Target revenue Number of skiers / snowboarders Target total costs Number of skiers / snowboarders Target total costs Reduced level of fixed costs Target total variable costs O Reduced level of fixed costs Target total variable costs (5) Revenue at market price Revenue at market price O Desired profit Target revenue Desired profit Target revenue Number of skiers / snowboarders Target total costs Number of skiers / snowboarders Target total costs Reduced level of fixed costs Target total variable costs Reduced level of fixed costs Target total variable costs (7) O Revenue at market price (8) almost equal to Desired profit Target revenue O approximately 50% Number of skiers / snowboarders Target total costs approximately two times Reduced level of fixed costs Target total variable costs 0 000 OOOO OOO (9) O may have a difficult time achieving should easily be able to achieve (10) O so much lower than O so much greater than somewhat equal to
