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Snow Paradise Inc. 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 16% return on the company's $115 million of assets. The company incurs primarily fixed costs to groom the runs and operate the lifts. Snow Paradise projects fixed costs to be $35,600,000 for the ski season. The resort serves 800,000 skiers and snowboarders each season. Variable costs are $8 per guest. The resort had such a favorable reputation among skiers and snowboarders that it had some control over the lift ticket prices.
Assume that Snow Paradise's reputation has diminished and other resorts in the vicinity are charging only $64 per lift ticket. Snow Paradise has become a price-taker and won't be able to charge more than its competitors. At the market price, Snow Paradise's managers believe they will still serve 800,000 skiers and snowboarders each season.
Problem 1: If Snow Paradise 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.
Problem 2: Assume that Snow Paradise has found ways to cut its fixed costs to $30 million. What is its new target variable cost per skier/snowboarder? Assume investors want to earn a 16% return on assets. Compare this to the current variable cost per skier/snowboarder. Comment on your results.
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