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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鈥檚 \(270,000,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. Skiable Acres projects fixed costs to be \)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

Priscilla Smiley manages a fleet of 250 delivery trucks for Daniels Corporation. Smiley must decide whether the company should outsource the fleet management function. If she outsources to Fleet Management Services (FMS), FMS will be responsible for maintenance and scheduling activities. This alternative would require Smiley to lay off her five employees. However, her own job would be secure; she would be Daniels鈥檚 liaison with FMS. If she continues to manage the fleet, she will need fleet management software that costs \(9,500 per year to lease. FMS offers to manage this fleet for an annual fee of \)300,000. Smiley performed the following analysis:

Retain in-house Outsource to FMS Difference

Annual leasing fee for \(9,500 \)9,500

Software

Annual maintenance of

Trucks 147,000 147,000

Total annual salaries of

Five laid-off employees 185,000 185,000

Fleet management

Service鈥檚 annual fee \(300,000 (300,000)

Total differential cost of

Outsourcing \)341,500 \(300,000 \)41,500

Requirements

1. Which alternative will maximize Daniels鈥檚 short-term operating income?

2. What qualitative factors should Daniels consider before making a final decision?

What questions should managers answer when setting regular prices?

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 \(1.90. Snappy Plants鈥檚 volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for \)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鈥檚 owners want to earn a 11% return on investment on the company鈥檚 assets. What is Snappy Plants鈥檚 target full product cost?

2. Given Snappy Plants鈥檚 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?

What makes information relevant to decision making?

What makes information irrelevant to decision making?
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