Assume that Winter Sports' reputation has diminished and other resorts in the vicinity are...

Question:

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 a 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.

Variable cost:

Variable cost is dependent upon the level of production. It will increase with the increase in the production volume and decrease if the production decreases. Example of variable cost includes direct labor, direct material, etc.

Answer and Explanation:

1.

Accounts Title Amount ($) Working
Revenue 48,750,000 750,000 * 65
Less: Fixed cost 33,750,000
Less: Variable cost 7,500,000 750,000 * 10
Operating income (a) 7,500,000
Assets (b) 100,000,000
Return on assets ((c) = (a)/(b) * 100) 7.5%


2.

Accounts Title Amount ($) Working
Revenue 48,750,000 65 * 750,000
Less: Desired profit 15,000,000 100,000,000 * 15%
Target total cost 33,750,000
Less: Net fixed cost 30,000,000
Target total variable cost (a) 3,750,000
Number of skiers 750,000
Variable cost per shier ((c) = (a)/(b)) 5

Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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