Solution 7.9

a) Calculate the average admission fee to achieve the consortiums after tax profit target. (Assume a tax rate of 20 per cent on profits).

This question requires the use of the Hubbart approach to pricing starting with the required return and working back-wards to calculate the income from admissions.

Net profit to achieve required return (800,000 x 7 per cent)	56,000	80%
Taxation (56,000 x 20 ¸ 80)	14,000	20%
Net profit before tax	70,000	100%
Loan interest (1,200,000 x 8%)	96,000
Net operating profit	166,000
Fixed costs	150,000
	316,000
Undistributed operating expenses	300,000
Total operating profit	616,000
Other operating profits	320,000
Direct profit from admissions	296,000
Direct wildlife feeding and care expenses	100,000
Admissions	396,000

Forecast number of visitors	67,500

Average admission price to achieve required profit	€5.86

b) If a family admission fee (two adults and two children) is set at €16, what should the single visitor admission fee need to be in order to achieve the profit target? (Assume 50 per cent of all visitors would be in families of four).

This requires calculating the amount of income generated from sales to families. This figure is then deducted from the total sales to achieve the required profit to get the sales required from single persons. This figure is divided by the number of single persons to get the average price per single person to achieve the required profit.

Total sales required to achieve required return				396000

Sales from family of 4	50% x 67,500		33,750
Income from family of 4	33750/4 x €16			135,000

Thus 33,750 single persons must generate				261,000

Average Price per single person		261000/33750		7.733333

c) Suggest four other factors which should be taken into account prior to finalising admission prices.

Level of competition
Seasonality
Level of demand and periods of high and low demand
State of local and international economies
Cost structure of the organisation