Burr Hill golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $10 per golfer. The Burr Hill golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Burr Hill charge for a round of golf?

Question

Quizplus · Accepted Answer

To achieve a 10% return on $50 million, Burr Hill needs $5 million profit. Total costs are $25 million fixed + $5 million variable ($10 per golfer for 500,000 golfers). Total revenue needed is $30 million costs + $5 million profit = $35 million. Dividing $35 million by 500,000 golfers gives a price of $70 per round.

Burr Hill Golf Course Is Planning for the Coming Season