Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $36,000,000 of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 520,000 members are expected to swim each year. Variable costs are about $12 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $40 for a membership. What profit will it earn in terms of dollars?

Question

Quizplus · Accepted Answer

First, we need to calculate the total revenue the company can earn by pricing their memberships at $40, given that they are a price-taker and cannot charge more than their competitors.

Revenue = Price x Quantity 
Revenue = $40 per membership x 520,000 members 
Revenue = $20,800,000

Next, we need to calculate the total variable costs associated with maintaining the swimming pools for 520,000 members.

Variable Costs = Cost per unit x Quantity 
Variable Costs = $12 per swimmer x 520,000 members 
Variable Costs = $6,240,000

Now, we can calculate the contribution margin, which is the difference between revenue and variable costs.

Contribution Margin = Revenue - Variable Costs 
Contribution Margin = $20,800,000 - $6,240,000 
Contribution Margin = $14,560,000

We can then use the contribution margin to calculate the company's operating income, which is the contribution margin minus fixed costs.

Operating Income = Contribution Margin - Fixed Costs 
Operating Income = $14,560,000 - $12,500,000 
Operating Income = $2,060,000

Therefore, the company will earn a profit of $2,060,000.

Philadelphia Swim Club Is Planning for the Coming Year