The food-service manager of Too-Simple Hotel is planning a new price structure for room service. It has been determined that the hotel's cost of a glass of orange juice is 20 cents. To provide the normal 75% profit margin on sales, 80 cents would need to be charged. Profit would then be 80 - 20 or 60 cents, which is 75% of the 80-cent sales price.
For menu items delivered by room service, a higher price will be charged to cover the cost of delivery to a guest's room. The cost of a delivery is 60 cents (not counting the cost of whatever menu items are delivered). To earn a normal profit, additional revenues averaging $2.40 must be earned on a delivery. The profit would then be $2.40 - $.60, or $1.80, which is 75% of the $2.40 delivery revenue.
The food-service manager estimates that an average delivery involves two items, so $1.20, or one-half the necessary $2.40 delivery revenue, will be added to the menu price of every room-service item. That brings the room-service price of a glass of orange juice to $.80 + $1.20, or $2.00.
Required
Answer the following questions:
(1) What percentage of profit margin on sales will be earned on a room-service order consisting of four glasses of orange juice?
(2) What percentage of profit margin on sales will be earned on a room-service order consisting of one glass of orange juice?
(3) What is the food-service manager treating as the cost object in setting room service prices?
(4) What refinement of the definition of cost objects would produce the desired 75% profit margin on sales?
(5) Using the refinement devised in requirement 4, recalculate the percentage of profit margin for requirements 1 and 2.
(6) What are the competitive implications of the food-service manager's planned price structure, compared with those resulting from the refined price structure?