Question 2: Childcare Services Pricing in a Ski Resort

You are the manager of a walk-in day-care program at a ski resort in Park City, Utah. You sell only one service - full-day care for children. You set a single price that reflects a full day of care per child. A friend carried out some pricing analysis for you and suggested that price-cost margins of 60% would maximize your profits. To implement this recommendation, you now set your prices to maintain a 60% gross margin.

In your business, the main costs of providing day care consist of the fixed rental costs of the space you use and the per-child costs associated with food and materials (e.g. diapers, wipes etc.) and wages for part-time babysitters (which are also roughly on a per-child basis). Typically, daily food and materials costs work out to roughly $10 per child. Also, daily costs associated with hiring babysitters work out to roughly $40 per child. Finally, the average daily rental costs for the commercial space used for the provision of service works out to roughly $175 per day. On an average day, the business cares for 25 children at the current prices, resulting in average rental costs of roughly $7 per child. These cost numbers are used to set prices.

It turns out that daily rental costs do contain a seasonal component. You actually own space in a building that you use for your core service. During your peak winter season, you typically rent extra space in the building to accommodate the high demand (i.e. demand exceeds your owned space). Daily rental costs for this extra space during the winter are $700 per day. This may seem high. But keep in mind that this mountain-side space could otherwise be used to create mountain-side condominiums that could be rented to skiers. However, during the other 3 seasons, rental costs are in fact $0 because you can accommodate all demand in the off-peak seasons with your owned space.

1)Given these costs, what price does the business actually charge?

2)Do you believe this price will maximize profits? If not, explain why you disagree. You do not need to recommend an alternative price per se. But, you might want to use break-even analysis to support your explanation.