Practise IB Business Management SL/HL 5.5.3 by applying effects of price and cost changes concepts to exam-style questions.
Himalayan Trekking
Himalayan Trekking (HT) is a trekking (mountain walking) agency based in Nepal. It has been operating guided treks for tourists in Nepal, Tibet and Bhutan for over 20 years. With a duration of between one and three weeks, HT offerings include treks to the Everest Base Camp, tours to Buddhist sites in Tibet, and treks even to the inaccessible Kingdom of Bhutan. Brand loyalty is very strong, with repeat bookings from many clients (trekkers).
The market for trekking has been growing very rapidly with many new businesses setting up to meet the increased demand for "adventure" holidays. In this competitive market, HT's unique selling proposition (USP) is to provide an unforgettable wilderness experience in a socially and ethically responsible manner. It only uses locally produced food and local guides and trekkers camp without wasting too many resources. All clients have to sign a contract to agree that they will act in a socially responsible manner throughout the trek. Though it always had a strong sense of social responsibility, HT had not promoted this aspect of the business until the management realized that changes in attitudes towards social responsibility could be used to gain competitive advantage.
HT's brochure states that:
- It is a market leader in adventure tourism for Nepal, Tibet and Bhutan. It caters to a wide range of clients from experienced to inexperienced trekkers.
- In recognition of protecting the fragile environment, economic systems and cultures it treks in, HT has been awarded a global quality standard.
- By employing local guides and using locally produced food, HT adds much value to the local region.
- It only employs staff that have previous social and environmental experience.
- It financially supports a non-governmental organization (NGO) for Nepali orphans by giving 5 % of its turnover to Child Environment Nepal (CEN).
Selected financial information for HT for 2013:
In 2014, the following changes occurred:
- annual fixed costs increased by 20 %
- rising fuel costs of flights increased average variable costs by 40 % per trekker.
The average price charged per trekker remained the same as did the number of clients (300).
Taking these changes into account, calculate the new break-even quantity and margin of safety for HT in 2014 (show all your working).
Explain one possible response from HT to the change in the break-even quantity and margin of safety calculated in part (i).