Q25-3SE - Horngren'S Financial And Managerial Accounting

Question

Refer to details about Skiable Acres from Short Exercise S25-2. Assume that Skiable Acres’s reputation has diminished and other resorts in the vicinity are charging only \(85 per lift ticket. Skiable Acres has become a price-taker and will not be able to charge more than its competitors. At the market price, Skiable Acres managers believe they will still serve 725,000 skiers and snowboarders each season.

Requirements 

1. If Skiable Acres cannot 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? 

2. Assume Skiable Acres has found ways to cut its fixed costs to \)30,000,000. What is its new target variable cost per skier/snowboarder?

Step-by-Step Solution

Answer

Answer

No, the investors will not be satisfied with the current profit level.

Step-by-Step Solution Step 1: Meaning of Investor

An investor is an individual, business, or group of institutions that invest their surplus funds in required areas to generate additional income or returns. Generally, investors invest in stock, bonds, and commodities.

Step 2: Computation of profit earned by Skiable

Particulars	Amounts ($)
Revenue at market price (725,000*85)	61,625,000
Less: Total cost (Working note)	36,800,000
Operating income	$24,825,000

Working Note:

Computation of Total Cost:

Particulars	Amounts ($)
Variable cost ($8*725,000)	5,800,000
Add: Fixed cost	31,000,000
Total Cost	$36,800,000

Profit as a percent of assets:

$\begin{array}{c}\mathbf{\text{Percent of asset}}\mathbf{=}\frac{\mathbf{\text{Operating income}}}{\mathbf{\text{Assets}}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{24}\mathbf{,}\mathbf{825}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{270}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{9}\mathbf{.19}\mathbf{\%}\end{array}$

Comment: The investors will not be happy with the current profit level because the rate of return is 9.19%, which is less than the desired, i.e. 10%. 

Step 3: Computation of new target variable cost

Particulars	Amounts ($)
Revenue at market price	61,625,000
Less: Desired profit (10% of assets)	(27,000,000)
Target full cost	34,625,000
Less: Reduced level of fixed cost	(30,000,000)
Target total variable cost	4,625,000
Divide: Number of skier	725,000
Target variable cost per skier	$6.37