answer question #1

The Glory Mountain State Ski Area The Glory Mountain State SkiArea – owned and managed by a state public authority - expects toattract 292,500 skier days during the coming ski season. A skierday represents one skier at the mountain for one day. In additionto a $2,000,000 per year subsidy provided by the state, Glorycurrently earns its revenue from three sources: lift ticket sales,ski lessons, and food sales in the mountain’s lodges. Forty-fivepercent of the customers come to the mountain on weekends and payan average of $60 per day to ski. The remaining 55 percent of theskiers come during the week and pay an average of $45 per day for alift ticket. On average, 10 percent of the people who visit Glorytake ski lessons. An average person taking lessons pays $80 foreach lesson. Management also estimates that each skier spends anaverage of $4 per day on food. Food costs average 40 percent oftotal food revenue. Glory’s central management staff is paid$1,800,000 per year. The remainder of Glory’s staff is seasonal andis paid on an hourly basis. The table below shows the number ofemployees by job title, the number of days they work on average,their hourly wages, and the number of hours they work each day.Only ski instructors and patrol costs vary with skier days.Benefits add 30 percent to direct salary costs for all workersincluding management. Equipment costs and usage are also shown inthe table below. For equipment, number refers to the number ofpieces of equipment. Equipment costs depend on the number of daysthe area is open during the season. The hourly fuel cost representsthe cost of fuel to operate the equipment for each hour they areopen. Number Days Worked Hours Worked Hourly Wage Instructors &Ski Patrol 275 100 7 $20.00 Lift Attendants, Maintenance &Grooming 140 130 10 $18.00 Kitchen Staff 50 130 8 $12.00 Equipment& Fuel Costs 60 130 6 $65.00 Insurance costs are $15,000 perday for each of the 130 days the area expects to be open. Energycosts are $2,240,000 per year and are based on the number of daysthe area is open. Neither energy nor insurance costs vary based onskier days. Question 1: You are the GloryMountain State Ski Area’s finance manager. Area Manager Dan Finnhas asked you to prepare a base operating budget for the ski areafor the coming fiscal year and to show the impact a 5 percentreduction in the number of skier days would have on Glory’soperating results. In planning for the next season, the StateRegional Development Authority, which manages the state’s five skiareas, is considering installing a 15-megawatt wind turbine at thetop of Glory Mountain. If they do, the ski area will reduce itsenergy bill by almost 25 percent or $560,000 per year for the next15 years. It will cost Glory $4,100,000 to complete theenvironmental assessments, do the necessary engineering studies,and install the turbine. In addition, the ski area will have toinvest $750,000 at the end of the seventh year to overhaul thebearings and replace some time-critical components. Fordepreciation purposes, the wind turbine has a useful life of 10years with no residual value. Glory uses straight-linedepreciation. Question 2: The state usesan 8 percent cost of capital for its ski areas. Based on purelyfinancial analysis, should the state install the turbine? Inaddition, the snowmaking equipment in the Bear Mountain section ofGlory Mountain has been in service for nearly 15 years and hasreached the end of its useful life. It will have to be replacedbefore the next ski season. Management has narrowed its decisiondown to two options: Big Mouth Snow Guns with a useful life of 15years and the Whisper Quiet Snowmaking System with a useful life of10 years. The Big Mouth system will cost Glory $850,000 to acquireand $35,000 per year to operate, while the Whisper Quiet systemwould only cost $600,000 and $50,000 per year to operate. If theBig Mouth equipment is chosen, there will be no change in Glory’sother operating costs. If the Whisper Quiet system is purchased,Glory’s annual fuel and equipment costs will increase by $15,000.Regardless of the option Glory chooses, the snowmaking systemchosen will be depreciated over ten years with an assumed 5 percentresidual value. Glory uses straight-line depreciation.Question 3: Based on Glory’s 8 percentcost of capital, which system should management choose? GloryMountain has never offered any type of day care for youngerchildren of skiing families. Given the changing demographics of itspatrons, Dan Finn thinks that the Mountain needs to offer thoseservices. Erika Fossett, Glory’s director of operations, has workedup a proposal for what she is calling the Glory Kids’ Center. Shewants it to provide combined day care and ski lessons for childrenbetween the ages of 3 and 7. The center would be run by a directorwho will earn $60,000 per year plus benefits. For every 10 childrenusing the Kids’ Center, the center will employ one full-timeinstructor. That instructor will provide both day care and skiinginstruction. Each instructor will earn $25 per hour includingbenefits. The center will provide 8 hours of care per day.Instructors will only be paid for the hours the children are at thecenter. The children are fed lunch and a snack at a cost of $10 perchild per day. Supplies for activities the children will be engagedin when they are not skiing will cost an average of $10 per child.Glory plans to charge $70 per day per child. Question4: As Glory’s finance manager, you have been asked toevaluate the fiscal feasibility of running Glory Kids’ Center. Yourfirst question is how many children will have to be at the centeron an average day for it to be profitable on a stand-alone basis.Erika Fossett believes that the Kids’ Center will add 6 percent tooverall skier days, and families with children between 3 and 7 willaccount for 10 percent of total skier days including the expectedincrease in volume. On average, families with children between 3and 7 will enroll .25 children in the center each day they ski. Sheexpects to employ an average of 6 instructors each day the ski areais open. Question 5: Prepare aspecial-purpose budget for the Glory Kids’ Center. Do not includethe incremental lift ticket revenue from the expected increase inthe volume of skier days in your estimate. After completing theseanalyses, Dan Finn asks you to update the budget to include theimpact of installing the wind turbine, replacing the snowmakingequipment and operating the Glory Kids’ Center. In addition, Glorywill have to issue a $6,000,000 bond to finance the acquisition ofthe equipment. The coupon rate on the bond will be 5 percent. Itwill require Glory to pay interest every six months and to repaythe full $6 million of principal in 20 years. The bonds will beissued on the first day of Glory’s fiscal year, and all equipmentwill be put in service that same day. Question6: Using the base budget from Question 1 as astarting point, prepare a revised budget for Glory thatincorporates all of these initiatives. At the end of the season,bad weather caused the mountain to be open for only 115 days withan average of 2,600 people per day and an average price per liftticket of $50.50. Question 7: Startingwith the revised budget, calculate the following lift ticketrevenue variances and indicate whether they were favorable orunfavorable. Be sure to add up the flexible (partial) variances andcheck to make sure that sum equals the total variance. a. Glory’stotal lift ticket revenue variance for the ski season b. theportion of the lift ticket revenue variance that was due to volumeof days c. the portion of the lift ticket revenue variance that wasdue to quantity of skiers per day d. the portion of the lift ticketrevenue variance that was due to price