Answer:
Mount Snow Inc.
a. Mount Snow would emphasize cost-plus pricing and not target costing. The target costing considered the investors expected returns on investment. Based on the target returns, customers were then charged any fee to meet the target profit, including all other costs. Now that Mount Snow is a price-taker, it cannot meet the target returns. It can only work with the cost-plus pricing strategy in order to rein in its costs.
b. As a price-taker, Mount Snow cannot charge more than $66. It should charge $66.
Explanation:
a) Data and Calculations:
Investors expected return on investment = 15%
Cost of investment = $115,000,000
Ski Season's Fixed costs = $43,500,000
No of skiers and snowboarders served = 900,000
Variable costs per guest = $10
Charges by other resorts in the vicinity = $66 per lift ticket
Total expected revenue $59,400,000 ($66 * 900,000)
Total variable costs = $9,000,000
Fixed costs = 43,500,000
Total costs = $52,500,000
Profit = $6,900,000
Target profit = $17,250,000 ($115,000,000 * 15%)
