Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 57

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?

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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.

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3. Describe two ways that Take-a-Break Travel could cut its costs to get the profit margin back to their original levels.

Step 1 of 3

Target Costing:

“The terminology of Target Costing is technique where the management of the company cannot determine the price based on the company polices but it being determined by factors which are external such as competition with other rivals, homogenous products etc.

The formula for deriving the Target Cost =Selling Price – Profit Margin.”

1.

Calculation of the current profit margin on both trips:

Deriving the excel cells are shown below:

Hence the current profit for the Cancum Trip is $126 and Jamaica is $200.