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Chapter 25: Q25-2SE (page 1407)

Skiable Acres 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 10% return on investment on the company’s \(270,000,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. Skiable Acres projects fixed costs to be \)31,000,000 for the ski season. The resort serves about 725,000 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.

Requirements

1. Would Skiable Acres emphasize target pricing or cost-plus pricing? Why?

2. If other resorts in the area charge \)85 per day, what price should Skiable Acres charge?

Short Answer

Expert verified

Answer

1. Skiable Acres should choose the cost-plus pricing approach.

2. Skiable Acres should charge$88 per day.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Pricing Decisions

Determining prices of products and services is one crucial function of business entities. Under this process, a business sets the price of its products after considering all theassociated costs and standard profit margin.

02

Selection of pricing approach

Based on the scenario mentioned above, thecost-plus pricing approach is appropriate for the company because it will facilitate the company to set the target selling price based on thecost and desired profitexpectation of the company. Also, the company is a price-setter in the given case.

03

Computation of the price should be charged by Skiable Acres

Particulars

Details

Amounts ($)

Variable cost

($8*725,000)

5,800,000

Add: Fixed cost

31,000,000

Full product cost

36,800,000

Add: Desired profit

(10%*270,000,000)

27,000,000

Target revenue

$63,800,000

Divide: Number of guests

725,000

Cost-plus price per guest

$88

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Most popular questions from this chapter

Snappy Plants operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Snappy Plants has \(5,100,000 in assets. Its yearly fixed costs are \)650,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total \(1.90. Snappy Plants’s volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for \)4.25 each. Garden centers then mark them up to sell to the public for \(9 to \)12, depending on the type of plant.

Requirements

1. Snappy Plants’s owners want to earn a 11% return on investment on the company’s assets. What is Snappy Plants’s target full product cost?

2. Given Snappy Plants’s current costs, will its owners be able to achieve their target profit?

3. Assume Snappy Plants has identified ways to cut its variable costs to \(1.75 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?

4. Snappy Plants started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Snappy Plants does not expect volume to be affected, but it hopes to gain more control over pricing. If Snappy Plants has to spend \)105,000 this year to advertise and its variable costs continue to be $1.75 per unit, what will its cost-plus price be? Do you think Snappy Plants will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

Question: Explain the difference between price-takers and price-setters.

What are the two keys in short-term decision making?

What questions should managers answer when considering dropping a product or segment?

Edna Fashions operates three departments: Men’s, Women’s, and Accessories. Departmental operating income data for the third quarter of 2018 are as follows:

EDNA FASHIONS

Income Statement

For the Quarter Ended September 30, 2018

Department

Men’s Women’s Accessories Total

Net Sales Revenue \(101,000 \)59,000 \(102,000 \)262,000

Variable Costs 65,000 35,000 91,000 191,000

Contribution Margin 36,000 24,000 11,000 71,000

Fixed Costs 27,000 19,000 29,000 75,000

Operating Income \(9,000 \)5,000 \((18,000) \)(4,000)

Assume that the fixed costs assigned to each department include only direct fixed costs of the department:

• Salary of the department’s manager

• Cost of advertising directly related to that department

If Edna Fashions drops a department, it will not incur these fixed costs. Under these circumstances, should Edna Fashions drop any of the departments? Give your reasoning.
See all solutions

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