Q25-2SE
Question
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?
Step-by-Step Solution
VerifiedAnswer
1. Skiable Acres should choose the cost-plus pricing approach.
2. Skiable Acres should charge $88 per day.
Determining prices of products and services is one crucial function of business entities. Under this process, a business sets the price of its products after considering all the associated costs and standard profit margin.
Based on the scenario mentioned above, the cost-plus pricing approach is appropriate for the company because it will facilitate the company to set the target selling price based on the cost and desired profit expectation of the company. Also, the company is a price-setter in the given case.
Particulars | Details | Amounts ($) |
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 |