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:
Package Specifications | Cancun | Jamaica | Cost Data |
Oceanfront room; number of nights | 6 | 4 | $ 30/night |
Meals: |
|
|
|
Breakfasts | 7 | 5 | $ 5/ea |
Lunches | 7 | 5 | $ 7/ea |
Dinners | 6 | 0 | $ 10/ea |
Scuba diving trips | 4 | 2 | $ 15/ea |
Water skiing trips | 5 | 2 | $ 10/ea |
Airfare (round trip from Miami) | 1 | 1 | $200 (Cancun), $355 (Jamaica) |
Transportation to and from airport | 1 | 1 | $ 15 (Cancun), $ 10 (Jamaica) |
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.
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