SnowCastles operates a Rocky Mountains ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to earn a 14% return on the company’s $100 million of
SnowCastles operates a Rocky Mountains ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to earn a 14% return on the company’s $100 million of assets.The company incures primarily fixed costs to be $34,000,000 for the ski season. The resort serves about 800,000 skiers and snowboarders each season. Variable cost 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.
1. Would SnowCastles emphasize target costing or const-plus pricing. Why?
2. If another resorts in the area charge $60 per day, what price should SnoCastles charge?
Consider SnowCastles from above. Assume that SnowCastles reputation has diminished and other resorts in the vicinity are charging only $60 per lift ticket. SnowCastles has become a price-taker and wont be able to charge more than its competitors. At the market price, SnowCastles managers believe they will still serve 800,000 skiersand snowboarders each season.
1. If SnowCastles 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 SnowCastles has found ways to cut its fixed costs to $31 million. What is its new target variable cost per skier / snowboarder? Compare this to the current variable cost per skier / snowboarder. Comment on your results.