1) Listen, elasticity is important, said the director of the aquarium, but we borrowed 21.6 million...

 

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1) "Listen, elasticity is important," said the director of the aquarium, "but we borrowed 21.6 million dollars (for 20 years, other fixed costs are 10,000 dollars per month)(total fixed costs per month are 100,000 dollars) to build the aquarium last year; we need to set a price of 16 dollars to be able to pay our debt since variable costs are four dollars per person, and we use a standard markup of 300 percent of variable costs (current price is $12). I've already reduced my promotion budget to pay the debt. If last month's attendance is any indication (only 10,000 customers), we will have to raise prices and maybe eliminate promotions. We can estimate elasticity when the debt is paid, although I don't think it is important since we are the only aquarium within 150 miles. Furthermore, there are four million people in the metropolitan area. If 50 percent of them visited the aquarium once (at 16 dollars per person), we could pay off our debt immediately." Do you agree or disagree with the director's approach? Explain. Note: The aquarium is open 30 days per month, eight hours a day. Do not limit your answer to price and financials. You must calculate elasticity, breakeven, and profit. Please show all work and place answers in the lines below. (55 points) SECONDARY DATA (estimates): Price Attendance $10 12,000 (12k) $12 10,000 (10k) $16 8,000 (8k) A Quantity (Q1 + Q2)/2 A Price (P1+ P2)/2 2k=(12k-10k) 2k=(10k-8k) 11k (12k+10k)/2 -2=(10-12) 11=(10+12)/2 9k=(10k+8k)/2 -4=(12-16) 14=(12+16)/2 ELASTICITY: A Quantity (Q1 + Q2)/2 A Price (P1 P2)/2 BREAKEVEN: Fixed Costs/Contribution Margin (CM) CM Price - Variable Cost Elasticity 10 to 12 $10 Elasticity 12 to 16 $12 $16 1) "Listen, elasticity is important," said the director of the aquarium, "but we borrowed 21.6 million dollars (for 20 years, other fixed costs are 10,000 dollars per month)(total fixed costs per month are 100,000 dollars) to build the aquarium last year; we need to set a price of 16 dollars to be able to pay our debt since variable costs are four dollars per person, and we use a standard markup of 300 percent of variable costs (current price is $12). I've already reduced my promotion budget to pay the debt. If last month's attendance is any indication (only 10,000 customers), we will have to raise prices and maybe eliminate promotions. We can estimate elasticity when the debt is paid, although I don't think it is important since we are the only aquarium within 150 miles. Furthermore, there are four million people in the metropolitan area. If 50 percent of them visited the aquarium once (at 16 dollars per person), we could pay off our debt immediately." Do you agree or disagree with the director's approach? Explain. Note: The aquarium is open 30 days per month, eight hours a day. Do not limit your answer to price and financials. You must calculate elasticity, breakeven, and profit. Please show all work and place answers in the lines below. (55 points) SECONDARY DATA (estimates): Price Attendance $10 12,000 (12k) $12 10,000 (10k) $16 8,000 (8k) A Quantity (Q1 + Q2)/2 A Price (P1+ P2)/2 2k=(12k-10k) 2k=(10k-8k) 11k (12k+10k)/2 -2=(10-12) 11=(10+12)/2 9k=(10k+8k)/2 -4=(12-16) 14=(12+16)/2 ELASTICITY: A Quantity (Q1 + Q2)/2 A Price (P1 P2)/2 BREAKEVEN: Fixed Costs/Contribution Margin (CM) CM Price - Variable Cost Elasticity 10 to 12 $10 Elasticity 12 to 16 $12 $16