Target Costing in a Service Firm Take-a-Break Travel Company offers spring break travel packages to college students. Two of its packages, a seven-day, six-night trip to Cancun and a five-day, four-night trip to Jamaica, have the following characteristics:
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Package Specifications
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Cancun
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Jamaica
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Cost Data
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Oceanfront room; number of nights
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6
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4
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$ 30/night
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Meals:
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|
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Breakfasts
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7
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5
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$ 5/ea
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Lunches
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7
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5
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$ 7/ea
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Dinners
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6
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0
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$ 10/ea
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Scuba diving trips
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4
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2
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$ 15/ea
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Water skiing trips
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5
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2
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$ 10/ea
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Airfare (round trip from Miami)
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1
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1
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$200 (Cancun), $355 (Jamaica)
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Transportation to and from airport
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1
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1
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$ 15 (Cancun), $ 10 (Jamaica)
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The Cancun trip sells for $750, and the Jamaica trip sells for $690.
Required
1. What are the current profit margins on both trips?
2. Take-a-Break's management believes that it must drop the price on the Cancun trip to $710 and on the Jamaica trip to $650 in order to remain competitive in the market. Recalculate profit margins for both packages at these price levels.
3. Describe two ways that Take-a-Break Travel could cut its costs to get the profit margin back to their original levels.