Question

a. At a new market price of $1,550 per two-person cabin, calculate the target cost that will allow Rainbow to earn the same profit margin percentage it currently earns.

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 $1,340 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’s competitors found a way to permanently lower its price to $1,550 per two-person cabin.

b. Calculate the target cost reduction that Rainbow must achieve if it expects to remain competitive. (Round your answer to 2 decimal places.)

Answer 1

	a)Ans Current profit margin = Selling price – current cost per cabin Current profit margin = $1,800 – $1,340 = $460 Current profit margin % = Current profit margin / Selling price Current profit margin % = $460 / $1,800 Current profit margin % = 25.55% Target cost = Selling price – Desired profit Target cost = $1,550 – ($1,550 * 25.55%) Target cost = $1,550 – $396=$1154 Target cost = $1,200
b.Ans:	Target cost reduction = Current cost – Target cost Target cost reduction = $1,340 – $1,154 Target cost reduction = $186