Question

Green Pastures golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Green Pastures golf course is a price-taker and won't be able to charge more than $60 per round because of local competition.

What will Green Pasture's expected profit shortfall be if it charges $60/round?

Answer 1

Expected profit shortfall = $ 800000

Explanation:

Fixed cost = $ 20000000

Variable cost = (500000*12) = $ 6000000

Total cost = $ 20000000+ $ 6000000= $ 26000000

Desired return = $ 40000000*12% = $ 4800000

Total cost + desired return = $ 26000000+$ 4800000= $ 30800000

Operating income at $ 60/round =Total revenue - Total cost =(500000*60) - $ 26000000

= $ 30000000 - $ 26000000= $ 4000000

$ 4800000 desired operating income - $ 4000000 operating income at $ 60/round equals a short fall of $ 800000