Finannce

Topics: Variable cost, Costs, Cost Pages: 45 (5864 words) Published: April 10, 2011
Finance

Chapter 19

Short Exercises

(5 min.) S 19-1

a.The price of the new printer is relevant.
b.The price you paid for the old printer is irrelevant because it is a past (sunk) cost that cannot be changed, regardless of your decision. c.The trade-in value of the old printer is relevant.
d.Paper costs are irrelevant because these costs will be the same with either the old printer or the new printer. e.The difference between the ink cartridges’ cost for the old printer and ink cartridges’ cost for the new printer is relevant. (10 min.) S 19-2

Req. 1

SnowDelight should emphasize a cost-plus approach to pricing because it has been able to differentiate its ski resort from others in the area. Because of its favorable reputation, managers will have some control over pricing. Of course, they still need to consider whether the cost-plus price is within the range customers are willing to pay.

Req. 2

Using a cost-plus pricing approach, the cost-plus price would be calculated as follows:

|Fixed costs |\$34,250,000 | |Plus: total variable costs (650,000 × \$11 per person) | 7,150,000 | |Total Costs |\$41,400,000 | |Plus: Desired profit (\$105 million × 13%) |13,650,000 | |Target revenue |\$55,050,000 | |Divided by number of skiers / snowboarders |÷ 650,000 | |Cost-plus price per lift ticket |\$ 85 |

The cost-plus price is only \$3 above competing ski resorts in the area. Given SnowDelight’s favorable reputation, they should be able to charge \$85 a day without affecting their volume. (10 min.) S 19-3

Req. 1

If SnowDelight is a price-taker, projected income is as follows:

|Revenue at market price (650,000 × \$75)……………….. |\$48,750,000 | |Total costs (from S 19-2)…………………………………. | (41,400,000) | |Operating income…………………………………………… |\$ 7,350,000 | |vs. Desired operating income (\$105 million × 13%)….. |\$13,650000 | |Profit expectation shortfall………………………………... |\$ 6,300,000 |

SnowDelight’s projected operating income as a percent of assets amounts to 7.00% (\$7.35 million ÷ \$105 million) rather than the desired 13%.

Will investors be happy with this profit level?
No, because the expected profit level does not meet the investors’ target return on assets.

Req. 2

If SnowDelight is able to reduce its fixed costs to \$28 million, its new target variable cost per skier/snowboarder is:

| |CALCULATIONS |TOTAL | |Revenue at market price |\$75 × 650,000 units = |\$48,750,000 | |Less: Desired profit |\$105 million × 13% |(13,650,000) |...