UNIT 6: PACKAGE TOUR COSTING

Q. What is the importance of break-even point in tour business?

Ans: The break-even point (BEP) holds immerse importance in the tourism industry, acting
as a crucial financial benchmark for tour operators and travel agencies. It’s the point where
the total revenue earned from selling tours equals the total cost incurred in operating them.

Here’s why the break-even point is so crucial in the tour business:

1. Informed pricing:

Knowing the BEP allows tour operators to set optimal prices for their tours. They can factor
in all their fixed and variable costs (rent, salaries, transportation, etc.) and ensure that the
price covers them while remaining competitive in the market.

2. Cost control and efficiency:

Monitoring the BEP helps tour operators identify areas where they can optimize costs and
improve efficiency. By analyzing cost breakdowns, they can pinpoint unnecessary expenses
or areas with high variability and implement strategies to reduce them.

3. Financial planning and viability:

Understanding the BEP is essential for financial planning and assessing the viability of new
tour packages. By calculating the BEP for a new tour, operators can estimate the minimum
number of participants needed to cover costs and make a profit.

4. Performance measurement and monitoring:

Tracking the BEP over time allows tour operators to measure their financial performance
and identify trends. If the BEP is consistently declining, it indicates improved cost control
and efficiency. Conversely, a rising BEP might signal rising costs or declining sales, prompting
corrective action.

Q. How does a tour operator arrive at the net income?

Ans: 1. Start with revenue: The initial step is to calculate the total revenue generated from
selling tour packages. This includes income from:

(i) Tour package sales: The price paid by participants for each purchased tour package.

(ii) Additional services: Revenue from optional activities, souvenirs, travel insurance, etc.
offered alongside the packages.

(iii) Other sources: Commissions from business partners (Airlines, hotels, cruise, etc.)

2. Subtract the cost of goods sold: Now deduct the cost of goods sold (COGS). In tours,
COGS represents the direct expenses associated with delivering the tour packages,
including;
(i) Direct costs: Transportation, accommodation, sightseeing fees, meals, activity costs, visas,
insurance.

(ii) Variable costs: Cost that fluctuate directly with tour volume, like local transportation,
guide fees, entrance fees.

3. Calculate gross profit: Subtracting COGS from total revenue gives you the gross profit.
This shows the tour operator’s initial profit before considering further expenses.

4. Factor in operating expenses: Now comes the deduction of operating expenses (OpEx),
which are general costs necessary for running the business but not directly tied to specific
tours:

(i) Fixed overhead/costs: Cost that remain constant regardless of tour volume, like rent,
salaries, marketing, office supplies.

(ii) Administrative costs: Legal fees, accounting fees, licenses, permits, etc.

5. Reach operating income: After subtracting OpEx from gross profit, you arrive at the
operating income. This represents the profit generated from core tour operations before
accounting for financial expenses and taxes.

6. Consider financial charges: Next, factor in financial charges like interest payments on
loans or bank charges. This gives you the profit before tax (PBT).

7. Pay the taxes: Finally, deduct the applicable taxes from PBT to reach the net income. This
is the actual profit earned by the tour operator after considering all revenue, expenses, and
taxes.

Q. What are the implicit and explicit costs in the package tour?

Ans: Explicit costs: These are easily identifiable and directly traceable back to the tour
operator.

(i) Transportation: Flights, trains, buses, cruises, local transportation within the destination,
any internal flights or ferries.

(ii) Accommodation: Hotels, hostels, campsites, or any unique lodging options listed in the
package.

(iii) Sightseeing and activities: Entrance fees to museums, historical sites, national parks,
guided tours, pre-booked cultural experiences.

(iv) Meals and drinks: Depending on the package, this may include some or all meals
(breakfast, lunch, dinner), sometimes even snacks or drinks.

(v) Visas and travel insurance: Not applicable for all tours, but if included, their cost adds to
the direct cost per participant.
Implicit costs: These are indirect, non-monetary costs that may not be directly reflected in
tour package prices. They represent the “opportunity costs” one incurs by choosing the
package tour, meaning the potential benefits you give-up by participating in the tour:

(i) Flexibility: Package tours follow a set of itinerary, limiting your freedom to explore
independently and spontaneously.

(ii) Time: Pre-planned schedules might not cater to your preferred pace or allow you to
linger longer at places you find particularly captivating.

(iii) Authenticity: Large groups and pre-arranged experiences can feel less authentic than
independent travel, potentially limiting your interaction with local culture and people.

(iv) Personal choices: Package tours might not cater to your specific dietary needs, interests,
or desired level of comfort.

(v) Hidden experiences: While the package might seem all-inclusive, there might be
additional expenses for souvenirs, tips, spontaneous activities, or any unexpected incident.