Gendason Golf Course has three short nine-hole golf courses that attract a good flow of customers. The current price is $8 and variable cost is $1.50 per (nine hole) round. Fixed cost for the year was $1,950,000. Operating income for fiscal 2015 was $650,000 on sales of $3,200,000. Significant increases in both fixed and variable costs have eroded Gendason's income over the last several years. In fact, management expects a 20% increase in both fixed and variable costs next year.
To offset the impact of the cost increases, management is contemplating a price increase of $2 per round.
1) Compute the number of rounds sold during fiscal 2015 and break-even level for fiscal 2015.
2) If the price is not increased for fiscal 2016, what is the expected operating profit? Assume the volume you computed in part a.
3) Compute the break-even level for fiscal 2016 (1) with the price increase and (2) without the price increase.
4) How many rounds at the new price will generate the SAME expected operating profit as you computed in part b?
5) If the price increase will decrease the number of rounds of golf sold by 20%, should it be implemented?