Identifying relevant issues for cost averaging Southwest Tours, Inc.
Identifying relevant issues for cost averaging Southwest Tours, Inc., organizes adventure tours for people interested in visiting a desert environment. A desert tour generally lasts three days. Southwest provides food, equipment, and guides. Nick Boles, the president of Southwest Tours, needs to set prices for the coming year. He has available the company’s past cost data in the following table.
Span of Time
Recent Tour
One Year
Ten Years
Total cost of tours (a)
$9,600
$465,000
$2,880,000
Number of tourists (b)
32
1,500
12,000
Cost per tourist (a ÷ b)
$300
$310
$240
Required
Write a memo to Mr. Boles explaining the potential advantages and disadvantages of using each of the different per tourist cost figures as a basis for establishing a price to charge tourists during the coming year. What other factors must Mr. Boles consider in developing a pricing strategy?
