1.See example how making pricing decisions

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.

Current variable costs

($8 per guest 680,000 guests)

$5,440,000

Plus: Fixed costs

37,000,000

Full product cost

42,440,000

Plus: Desired profit

(12% $111,000,000 assets)

13,320,000

Target revenue

$ 55,760,000

Divided by number of guests

680,000 guests

Cost-plus price per guest

$ 82 per guest

PRACTICE-1

HILTON 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 13% return on investment on the company's $121,000,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. HILTON projects fixed costs to be $38,000,000 for the ski season. The resort serves about 690,000 skiers and snowboarders each season. Variable costs are about $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.

Current variable costs

($10 per guest x 690,000 guests)

$6,900,000

Plus: Fixed costs

38,000,000

Full product cost

44,900,000

Plus: Desired profit

(13% $121,000,000 assets)

15,730,000

Target revenue

$ 60,630,000

Divided by number of guests

690,000 guests

Cost-plus price per guest

$ 87.87 per guest

2 .See example how making pricing decisions

Refer to details about Mountain Run from example 1. 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.

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?

Revenues

(680,000 guests @ $80 per lift ticket)

$54,400,000

Less: Costs

[37,000,000 + ($8 per guest 680,000 guests)]

42,440,000

Profits

11,960,000

Divided by assets

111,000,000

Profit as a % of assets

10.77%

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?

Revenue at market price

(calculated above)

$54,400,000

Less: Desired profit

(12% $111,000,000 assets)

13,320,000

Target full product cost

41,080,000

Less: Fixed costs

36,320,000

Variable costs

$4,760,000

Divided by guests

680,0000 guests

Target variable cost per guest

$7 per guest

PRACTICE-2

Refer to details about HILTON from practice 1. Assume that Mountain Run's reputation has diminished and other resorts in the vicinity are charging only $78 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 690,000 skiers and snowboarders each season.

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?

Revenues

Less: Costs

Profits

Divided by assets

Profit as a % of assets

2. Assume Mountain Run has found ways to cut its fixed costs to $37,320,000. What is its new target variable cost per skier/snowboarder?

Revenue at market price

Less: Desired profit

Target full product cost

Less: Fixed costs

Variable costs

Divided by guests

Target variable cost per guest