Rainbow Cruises operates a week-long cruise tour through the Hawaiian Islands. P
ID: 2348181 • Letter: R
Question
Rainbow Cruises operates a week-long cruise tour through the Hawaiian Islands. Passengers currently pay $1,800 for a two-person cabin, which is an all-inclusive price that includes food, beverages, and entertainment. The current cost to Rainbow per two-person cabin is $1,440 for the week-long cruise, and at this cost, Rainbow is able to earn the minimum profit margin needed to operate the business. Rainbow competes with two other cruise lines and, to date, $1,800 has been the prevailing market price for the week-long cruises. Each cruise line provides exactly the same services to their passengers, but recently one of Rainbow
Explanation / Answer
a.
Current profit margin = Selling price – current cost per cabin
Current profit margin = $1,800 – $1,440 = $360
Current profit margin % = Current profit margin / Selling price
Current profit margin % = $360 / $1,800
Target cost = Selling price – Desired profit
Target cost = $1,500 – ($1,500 * 20%)
Target cost = $1,500 – $300
b.
Target cost reduction = Current cost – Target cost
Target cost reduction = $1,440 – $1,200
a.
Current profit margin = Selling price – current cost per cabin
Current profit margin = $1,800 – $1,440 = $360
Current profit margin % = Current profit margin / Selling price
Current profit margin % = $360 / $1,800
Current profit margin % = 20%
Target cost = Selling price – Desired profit
Target cost = $1,500 – ($1,500 * 20%)
Target cost = $1,500 – $300
Target cost = $1,200
b.
Target cost reduction = Current cost – Target cost
Target cost reduction = $1,440 – $1,200
Target cost reduction = $240
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