You have just started work for a small company, FitCo, that develops private fitness clubs in small towns. FitCo buys or leases a local hotel or motel, then renovates to provide a gym, swimming pool, sauna, Jacuzzi, and a small café where patrons can buy juices, smoothies, and other healthy snacks . FitCo only develops clubs in towns where it has no competitors. The main product is a one-month membership, which gives patrons unlimited use of the gym and other club facilities. So far FitCo has opened 24 such clubs in different towns.
Your new boss, Sarah, gives you a copy of an Excel spreadsheet containing data collected last year on FitCo’s 24 existing clubs. She asks you to use the data to complete the following important and time-sensitive tasks
How do you calculate the following?
1) For Town H and Town W determine whether the price charged last year was above, below or equal to the profit-maximizing price.
5. FitCo is considering opening a 25th club. The company must choose between one of two towns in which to locate the new club. Both towns have populations of 22,000. However, one of the towns has a relatively high average income of $60,000, while the other has a relatively low average income of $45,000. The annual fixed costs of running the club in the high income town would be about $160,000, while annual fixed costs of running the club in the low income town would be about $70,000. Your job is to select the site for the 25th club and to determine the appropriate price for the one-month memberships.
Does anyone have an anser to this one? I don't know how to calculate the 2 questions either.
To determine whether the price charged in Town H and Town W last year was above, below, or equal to the profit-maximizing price, you'll need to compare the actual price charged in each town with the profit-maximizing price.
The profit-maximizing price can be determined based on the demand and costs data for each town. To calculate it, you need the following information:
- Total revenue: This is the product of the price charged and the quantity sold.
- Total cost: This includes both the fixed costs and the variable costs associated with operating the club in each town.
- Profit: It is the difference between the total revenue and the total cost.
Follow these steps to calculate the profit-maximizing price for each town:
1. Calculate the total revenue: Multiply the price charged for the one-month membership by the quantity sold in each town. In the Excel spreadsheet, look for columns indicating the price and the number of memberships sold in Town H and Town W. Multiply the values in each row to get the total revenue for that town.
2. Calculate the total cost: Add the fixed costs and the variable costs associated with operating the club in each town. In the Excel spreadsheet, look for columns indicating the fixed costs and the variable costs per membership in Town H and Town W. Multiply the variable costs per membership by the number of memberships sold to get the total variable costs. Then add the fixed costs to the total variable costs.
3. Calculate the profit: Subtract the total cost from the total revenue for each town. This will give you the profit for that town.
4. Compare the actual price charged with the profit-maximizing price: Compare the price charged last year to the profit-maximizing price calculated for each town. If the actual price charged is higher than the profit-maximizing price, it was priced above the profit-maximizing level. If it is lower, it was priced below the profit-maximizing level. If it is equal, then it was priced at the profit-maximizing level.
Repeat the above steps for both Town H and Town W using the data provided in the Excel spreadsheet to determine whether the price charged was above, below, or equal to the profit-maximizing price in each town.
Now let's move on to selecting the site for the 25th club and determining the appropriate price for the one-month memberships.
1. Calculate the profit potential for each town: Similar to the previous analysis, calculate the total revenue, total cost, and profit for each town. Use the population and income data provided for the high income and low income towns in the Excel spreadsheet. Apply the same method as before to calculate these values.
2. Compare the profit potential for each town: Compare the profit potential for the high income and low income towns. The profit potential is the profit you just calculated for each town. Consider not only the profit but also the fixed costs of running the club in each town.
- The high income town has an annual fixed cost of $160,000, and the low income town has an annual fixed cost of $70,000. Compare the profit potential after deducting these fixed costs in each town.
3. Select the site for the 25th club: Choose the town with the higher profit potential after deducting the fixed costs. This town is likely to generate more profit for the company.
4. Determine the appropriate price: Once you have selected the town, you need to determine the appropriate price for the one-month memberships. To do this, consider the demand in the chosen town. Look for the price elasticity of demand or any information about the relationship between price and demand in the Excel spreadsheet. With this data, assess the price sensitivity of potential customers and set a price that maximizes revenue while considering the competitive landscape in the chosen town.
By following these steps, you can calculate whether the price charged last year in Town H and Town W was above, below, or equal to the profit-maximizing price, and also select the site for the 25th club and determine the appropriate price for the one-month memberships.