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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/ea
Dinners
0
$ 10/ea
Scuba diving trips
2
$ 15/ea
Water skiing trips
Airfare (round trip from Miami)
1
$200 (Cancun), $355 (Jamaica)
Transportation to and from airport
$ 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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