7.

1 TOUR COSTING

7.1 TOUR COSTING

In the tourism industry, mathematics is applied in various ways to provide tourists (clients) with
accommodation, transportation, and other travel services. In this section, we will study how
mathematics is applied to establish the selling price of a service (such as the price of flight tickets,
hotels, stay, etc.) so that all the costs are covered with an acceptable profit margin.
The selling price is the cost plus the amount of markup.
Selling Price = Cost + Markup

The profit margin (%) is the rate of markup on the selling price.
Markup
Profit Margin (Rate of Markup on Selling Price) = × 100%
Selling Price

Substituting and rearranging the previous two formulas, we obtain the following formula for selling price:

Cost
Selling price =
(1 – Profit Margin)

The following two assumptions are followed while solving the examples:

• All costs are transferred to the client (tourist).

• The combined costs for Taxes, Gratuities (also called tips), and Service Charges
(TGSC) are always quoted separately from the final price to the client.

EXAMPLE 7.1A
Safe Air Travel signed a contract with a tour company for 14 weeks over the winter. The aircraft has 130
seats and the tour company would have to pay Safe Air Travel C$1,400,000 for the 14 week season in
addition to air taxes of C$325 per person. The tour company offers weekly tour packages that include
return flights from Toronto to Puerto Vallarta once every week. The company also contracted a hotel
in Puerto Vallarta at C$140 per room per night based on double occupancy. Clients would be required
to pay an additional C$25 per person for baggage handling and transfer charges and C$1.25 per person
per night for gratuities at the hotel. Taxes are additional for all the rates.
Calculate the following before taxes:
(a) Cost per seat for the company.
(b) Hotel cost per person for the company.
(c) Total base cost per person for the company.
(d) Price per client, if the tour company has a profit margin of 20%.
(e) Quoted price to clients (include TGSC separately).

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CHAPTER 7 | Math Applications for Tourism

SOLUTION
(a) Number of seats = 130
Number of weeks = 14
Cost to book the aircraft for 14 weeks = C$1,400,000.00
Cost to book the aircraft for 1 week = 1,400,000.00 ÷ 14 = C$100,000.00
Therefore, cost per seat = 100,000.00 ÷ 130 = C$769.23

(b) C$140 for 1 room for 2 people (double occupancy)

Therefore, the cost per person = 140 ÷ 2 = C$70.00
For 7 days, the cost per person would be 7 × 70 = C$490.00

(c) Total base cost = C$769.23 (flight) + C$490.00 (hotel) = C$1,259.23 per person
Cost 1259.23
(d) Selling price = = = C$1,574.04
(1 – Profit Margin) (1 – 0.20)

(e) Air tax = $325 per person

Gratuity = $1.25 × 7 = $8.75 per person per week
Service charges = $25 per person
TGSC = 325.00 + 8.75 + $25.00 = $358.75 per person
Therefore, the price quoted to clients is C$1,574.04 plus TGSC of $358.75.

EXERCISES 7.1 Answers to the odd numbered problems are available online
1. A tour operating company has a series of flights servicing tour operations starting in January
and ending in May. This gives the company 3 ferry/live flights and 15 live/live flights. The
charters are back-to-back with 7 night stays. There are 130 seats on each aircraft. The company’s
operating costs are $18,000 for ferry/live and $20,000 for live/live. Air taxes per person are $150.
The company negotiates a cost of $150 per person per night at a hotel plus a service charge of
$2.50 per person per night. Airport/hotel return transfer by local road coach is $30 per person.
Taxes are additional for all the rates.

Calculate the following before taxes:

(a) Cost per seat for the company.
(b) Hotel cost per person for the company.
(c) Total base cost per person for the company.
(d) Price per client, if the company has a profit margin of 20%.
(e) Quoted price to clients (include TGSC separately).

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 7.2 COMMISSIONS, TAXES, AND DISCOUNTS

2. Ryan’s tour company offers weekly tour packages that include return flights from Ottawa to
Hawaii once every week. He contracted Phoenix Air Travel for $1,600,000 to use their 150-seater
aircrafts for a period of 16 weeks.
He also contracted a hotel in Hawaii at C$200 per room per night based on double occupancy.
In addition to the price of the package, each client is required to pay C$450 for air taxes, C$20
for baggage handling and transfer charges as well as C$3.25 per night for gratuities at the hotel.
Taxes are additional for all the rates.

Calculate the following before taxes:

(a) Cost per seat for the company.
(b) Hotel cost per person for the company.
(c) Total base cost per person for the company.
(d) Price per client, if the company has a profit margin of 30%.
(e) Quoted price to clients (include TGSC separately).

7.2 COMMISSIONS, TAXES, AND DISCOUNTS

COMMISSIONS
Tour operators (or travel counsellors) receive commissions or charge fees for the service that they offer.
A few examples of common commissions as allocated for each booking are as follows:

SERVICE COMMISSION PERCENT

Car booking 6%
Prepaid hotels 10%
Hotels paid at checkout 7%
Activities 10%
Vacation packages
5%
(flight + hotel, flight + hotel + car rental for a minimum 3 hotel nights)
Vacation packages
3%
(flight + hotel, flight + hotel + car rental for less than 3 hotel nights)
GDS (Global Distribution System) hotel 2%

In situations where tour operators charge fees, it may be either a flat fee for a service or a fee per
activity.

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