The Glory Mountain State Ski Area $$ owned and managed by a state public authority $-$ expects to attract $292,500$ skier days during the coming ski season. A skier day represents one skier at the mountain for one day. In addition to a $$2,000,000$ per year subsidy provided by the state, Glory currently earns its revenue from three sources: lift ticket sales, ski lessons, and food sales in the mountain$$s lodges. Forty$-$five percent of the customers come to the mountain on weekends and pay an average of $$60$ per day to ski. The remaining $55$ percent of the skiers come during the week and pay an average of $$45$ per day for a lift ticket. On average, $10$ percent of the people who visit Glory take ski lessons. An average person taking lessons pays $$80$ for each lesson. Management also estimates that each skier spends an average of $$4$ per day on food. Food costs average $40$ percent of total food revenue.

Glory$$s central management staff is paid $$1,800,000$ per year. The remainder of Glory$$s staff is seasonal and is paid on an hourly basis. The table below shows the number of employees by job title, the number of days they work on average, their hourly wages, and the number of hours they work each day. Only ski instructors and patrol costs vary with skier days. Benefits add $30$ percent to direct salary costs for all workers including management.

Equipment costs and usage are also shown in the table below. For equipment, number refers to the number of pieces of equipment. Equipment costs depend on the number of days the area is open during the season. The hourly fuel cost represents the cost of fuel to operate the equipment for each hour they are open.

Number Days Worked Hours Worked Hourly Wage

Instructors & Ski Patrol $2751007$ $$20\mathrm{.}00$

Lift Attendants, Maintenance & Grooming $14013010$ $$18\mathrm{.}00$

Kitchen Staff $501308$ $$12\mathrm{.}00$

Equipment & Fuel Costs $601306$ $$65\mathrm{.}00$

Insurance costs are $$15,000$ per day for each of the $130$ days the area expects to be open. Energy costs are $$2,240,000$ per year and are based on the number of days the area is open. Neither energy nor insurance costs vary based on skier days.

Question $1$: You are the Glory Mountain State Ski Area$$s finance manager. Area Manager Dan Finn has asked you to prepare a base operating budget for the ski area for the coming fiscal year and to show the impact a $5$ percent reduction in the number of skier days would have on Glory$$s operating results.

In planning for the next season, the State Regional Development Authority, which manages the state$$s five ski areas, is considering installing a $15-$megawatt wind turbine at the top of Glory Mountain. If they do$,$ the ski area will reduce its energy bill by almost $25$ percent or $$560,000$ per year for the next $15$ years. It will cost Glory $$4,100,000$ to complete the environmental assessments, do the necessary engineering studies, and install the turbine. In addition, the ski area will have to invest $$750,000$ at the end of the seventh year to overhaul the bearings and replace some time$-$critical components.

For depreciation purposes, the wind turbine has a useful life of $10$ years with no residual value. Glory uses straight$-$line depreciation.

Question $2$: The state uses an $8$ percent cost of capital for its ski areas. Based on purely financial analysis, should the state install the turbine?

In addition, the snowmaking equipment in the Bear Mountain section of Glory Mountain has been in service for nearly $15$ years and has reached the end of its useful life. It will have to be replaced before the next ski season. Management has narrowed its decision down to two options: Big Mouth Snow Guns with a useful life of $15$ years and the Whisper Quiet Snowmaking System with a useful life of $10$ years. The Big Mouth system will cost Glory $$850,000$ to acquire and $$35,000$ per year to operate, while the Whisper Quiet system would only cost $$600,000$ and $$50,000$ per year to operate.

If the Big Mouth equipment is chosen, there will be no change in Glory$$s other operating costs. If the Whisper Quiet system is purchased, Glory$$s annual fuel and equipment costs will increase by $$15,000.$

Regardless of the option Glory chooses, the snowmaking system chosen will be depreciated over ten years with an assumed $5$ percent residual value. Glory uses straight$-$line depreciation.

Question $3$: Based on Glory$$s $8$ percent cost of capital, which system should management choose?

Glory Mountain has never offered any type of day care for younger children of skiing families. Given the changing demographics of its patrons, Dan Finn thinks that the Mountain needs to offer those services. Erika Fossett, Glory$$s director of operations, has worked up a proposal for what she is calling the Glory Kids$$ Center. She wants it to provide combined day care and ski lessons for children between the ages of $3$ and $7.$