Question

.An amusement park faces large fixed costs of $500,000 per month and low average variable costs of $10 per visitor. It charges all visitors a flat entry fee of $50 for unlimited rides.

a) .What is the breakeven point for this park?

b) .The park currently has 42,000 visitors a month and proposes to raise its entry fee to $60 per person in order to cover the cost of a new Harry Potter–themed ride. What is the new breakeven point if the variable cost increases to $15 per visitor?

c ) .If the park now receives 25,000 visitors a month because of the increase in entrance fee in Part (b), will the park still be profitable?

Answer 1

Answer : a) The formula of breakeven point is

Breakeven point = Fixed Cost / ( Price - Variable Cost ) = 500000 / ( 50 - 10 ) = 12500 units.

b) According to the question, new price = $60 ; visitors numbers = 42000 ; New variable cost = $15

New breakeven point = 500000 / ( 60 - 15 ) = 11111.111 units.

In this case total revenue of the park = price × number of visitors = 60 × 42000 = $2520000.

c) Now number of visitors = 25000 ; Price = $60.

Total Revenue of the park = 25000 × 60 = $1500000

Total Cost = Fixed Cost + Variable Cost = 500000 + 15 = $500015. [ As variable cost =$15 according to part (b) ]

Profit = Total Revenue - Total Cost = 1500000 - 500015 = $999985

When visitors = 42000, Profit = 2520000 - 500015 = $2019985

Therefore, it is clear that in both the cases the park earns profit.