answer question #5 The Glory Mountain State Ski Area The GloryMountain State Ski Area – owned and managed by a state publicauthority - expects to attract 292,500 skier days during the comingski season. A skier day represents one skier at the mountain forone day. In addition to a $2,000,000 per year subsidy provided bythe state, Glory currently earns its revenue from three sources:lift ticket sales, ski lessons, and food sales in the mountain’slodges. Forty-five percent of the customers come to the mountain onweekends and pay an average of $60 per day to ski. The remaining 55percent of the skiers come during the week and pay an average of$45 per day for a lift ticket. On average, 10 percent of the peoplewho visit Glory take ski lessons. An average person taking lessonspays $80 for each lesson. Management also estimates that each skierspends an average of $4 per day on food. Food costs average 40percent of total food revenue. Glory’s central management staff ispaid $1,800,000 per year. The remainder of Glory’s staff isseasonal and is paid on an hourly basis. The table below shows thenumber of employees by job title, the number of days they work onaverage, their hourly wages, and the number of hours they work eachday. 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 Glory Mountain State Ski Area’sfinance manager. Area Manager Dan Finn has asked you to prepare abase operating budget for the ski area for the coming fiscal yearand to show the impact a 5 percent reduction in the number of skierdays would have on Glory’s operating results. In planning for thenext season, the State Regional Development Authority, whichmanages the state’s five ski areas, is considering installing a15-megawatt wind turbine at the top of Glory Mountain. If they do,the ski area will reduce its energy bill by almost 25 percent or$560,000 per year for the next 15 years. It will cost Glory$4,100,000 to complete the environmental assessments, do thenecessary engineering studies, and install the turbine. Inaddition, the ski area will have to invest $750,000 at the end ofthe seventh year to overhaul the bearings and replace sometime-critical components. For depreciation purposes, the windturbine has a useful life of 10 years with no residual value. Gloryuses straight-line depreciation. Question 2: The state uses an 8percent 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 percent cost of capital, which system shouldmanagement choose? Glory Mountain has never offered any type of daycare for younger children of skiing families. Given the changingdemographics of its patrons, Dan Finn thinks that the Mountainneeds to offer those services. Erika Fossett, Glory’s director ofoperations, has worked up a proposal for what she is calling theGlory Kids’ Center. She wants it to provide combined day care andski lessons for children between the ages of 3 and 7. The centerwould be run by a director who will earn $60,000 per year plusbenefits. For every 10 children using the Kids’ Center, the centerwill employ one full-time instructor. That instructor will provideboth day care and skiing instruction. Each instructor will earn $25per hour including benefits. The center will provide 8 hours ofcare per day. Instructors will only be paid for the hours thechildren are at the center. The children are fed lunch and a snackat a cost of $10 per child per day. Supplies for activities thechildren will be engaged in when they are not skiing will cost anaverage of $10 per child. Glory plans to charge $70 per day perchild. Question 4: As Glory’s finance manager, you have been askedto evaluate the fiscal feasibility of running Glory Kids’ Center.Your first question is how many children will have to be at thecenter on an average day for it to be profitable on a stand-alonebasis. Erika Fossett believes that the Kids’ Center will add 6percent to overall skier days, and families with children between 3and 7 will account for 10 percent of total skier days including theexpected increase in volume. On average, families with childrenbetween 3 and 7 will enroll .25 children in the center each daythey ski. She expects to employ an average of 6 instructors eachday the ski area is open. Question 5: Prepare a special-purposebudget for the Glory Kids’ Center. Do not include the incrementallift ticket revenue from the expected increase in the volume ofskier days in your estimate. After completing these analyses, DanFinn asks you to update the budget to include the impact ofinstalling the wind turbine, replacing the snowmaking equipment andoperating the Glory Kids’ Center. In addition, Glory will have toissue a $6,000,000 bond to finance the acquisition of theequipment. The coupon rate on the bond will be 5 percent. It willrequire Glory to pay interest every six months and to repay thefull $6 million of principal in 20 years. The bonds will be issuedon the first day of Glory’s fiscal year, and all equipment will beput in service that same day. Question 6: Using the base budgetfrom Question 1 as a starting point, prepare a revised budget forGlory that incorporates all of these initiatives. At the end of theseason, bad weather caused the mountain to be open for only 115days with an average of 2,600 people per day and an average priceper lift ticket of $50.50. Question 7: Starting with the revisedbudget, calculate the following lift ticket revenue variances andindicate whether they were favorable or unfavorable. Be sure to addup the flexible (partial) variances and check to make sure that sumequals the total variance. a. Glory’s total lift ticket revenuevariance for the ski season b. the portion of the lift ticketrevenue variance that was due to volume of days c. the portion ofthe lift ticket revenue variance that was due to quantity of skiersper day d. the portion of the lift ticket revenue variance that wasdue to price