Question: Target service costs, value engineering, activity-based costing. Lagoon is an amusement park that offers family-friendly entertainment and attractions. The park boasts more than 25 acres of fun. The admission price to enter the park, which includes access to all attractions, is $35. At this entrance price, Lagoon's target profit is 35% of revenues. Lagoon's managers have identified the major activities that drive the cost of operating the park. The activity cost pools, the cost driver for each activity, and the cost per unit of the cost driver for each pool are:
The following additional information describes the existing operations:
- The park operating hours are 10:00 a.m.-8:00 p.m., 7 days a week. The average number of patrons per week is 55,000.
- Lagoon maintains an online Web site for advance ticket purchases. This site is maintained by an outside company that charges $1 per ticket sold. Only 15% of the tickets are purchased online.
- Once the ticket is purchased, another park employee checks the ticket and stamps the patron for potential exit and reentry.
- The park has 27 attractions. A run is the complete cycle of loading, monitoring, and off-loading of patrons. On average, the attractions can make 6 runs an hour. The cost of operating the attractions includes wages of operator, maintenance, and depreciation of equipment.
- Cleaning crew members are assigned to 1-acre areas. One person can cover approximately 1 acre per hour. Each acre is covered continuously. The cost of litter patrol includes the wages of the employee and cleaning supplies.
In response to competitive pressures and to continue to attract 55,000 patrons per week, Lagoon has decided to lower ticket prices to $33 per patron. To maintain the same level of profits as before, Lagoon is looking to make the following improvements to reduce operating costs:
- Spend $1,000 per week on advertising to promote awareness of the available online ticket purchase. Lagoon's managers expect that this advertising will increase online purchases to 40% of total ticket sales. At this volume, the cost per online ticket sold will decrease to $0.75.
- Reduce the operating hours for eight of the attractions that are not very popular from 10 hours per day to 7 hours per day.
- Increase the number of refuse containers in the park at an additional cost of $250 per week. Litter patrol employees will be able to cover 1.25 acres per hour.
- The cost per unit of cost driver for all other activities will remain the same.
- Does Lagoon currently achieve its target profit of 35% of sales?
Required: 1. Will the new changes and improvements allow Lagoon to achieve the same target profit in dollars? Show your calculations.
2. What challenges might managers at Lagoon encounter in achieving the target cost? How might they overcome these challenges?