3 Essay questions

1. The Tropical Paradise Resort is located on the coast of an exotic Pacific island. Room rates are $300 per night, which includes free access to the pool, gym, and tennis courts. The resort also offers the following services: 

· Aerobics classes ($5 per)

· Therapeutic massages ($40 per)

· Scuba-diving trip to a nearby coral reef ($60 per)

· Day trips to an island volcano ($100 per trip)

The average stay is five days. The hotel is considering two pricing options: 

1. Charge the regular room rate and charge separately for the four services above

2. Charge a higher room rate, which includes the services

The resort’s objective is to maximize long-term profits by attracting repeat and new customers. Should they price their services separately or bundle them? Why? Besides prices, what other factors are important in your decision?

____________________________________________________________________________________

2. “Listen, elasticity is important,” said the director of the aquarium, “but we borrowed $21.6 million (for 20 years, other fixed costs are $10,000 per month; total fixed costs per month are $100,000) to build the aquarium last year. We need to set a price of $16 to be able to pay our debt since variable costs are four dollars per person, and we use a standard markup of 300% 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 promotion. 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 4,000,000 people in the metropolitan area. If 50% of them visited the aquarium once (at $16 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 per day. Do not limit your answer to price alone. Secondary data (comparable city’s aquarium) __________________________________________________________________________  

3. Gobi Inc. has sales of $40,000,000. The contribution margin is 40% and the fixed costs are $3,000,000. The variable cost per unit is $12. The company is considering two different strategies for increasing their profits: 

1. Spend $2,000,000 in advertising; the results is expected to increase the company’s sales by 25% 

2. Reduce the price by 20%; the price-demand elasticity is -3.0

Which of the two strategies will generate the highest overall profits? Show all calculations!