Question

See the Winter Sports Inc. data from S8-2. Assume that Winter Sports' reputation has diminished and other resorts in the vicinity are charging only $65 per lift ticket. Winter Sports has become a price-taker and won't be able to charge more than its competitors. At the market price, Winter Sports' managers believe they will still serve 750,000 skiers and snowboarders each season .

1. If Winter Sports 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 Sports 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.

Answer 1

Winter Sports Inc.'s profit at a $65 per lift ticket price and 750,000 visitors can be calculated by subtracting total costs from total revenue. Investors' happiness will depend on the percent return on assets, which is expected to be at least 15%. The new target variable cost can be found by considering fixed cost reductions and the desired return.

Step-by-step explanation:

In the scenario given, Winter Sports Inc. can't charge more than the market price of $65 per lift ticket due to decreased demand and increased competition. If they serve 750,000 skiers and snowboarders each season and are unable to reduce costs, the profit earned will depend on their current total costs (fixed and variable) subtracted from the total revenue, which would be $65 multiplied by 750,000. The profit percentage as a percent of assets would further depend on the asset value they have stated. Investors typically expect a return on the assets, and considering a 15% return, the profits can be adjusted to see if they match these expectations.

When fixed costs are reduced to $30 million and investors expect a 15% return on assets, Winter Sports must calculate the new target variable cost per skier/snowboarder. This would be the total costs allowed (including the desired return on assets) subtracted from fixed costs and divided by the number of skiers/snowboarders.