What costs are relevant when pricing a cargo ship cruise?

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Challenging economic conditions in several countries have pushed freight ship companies to look for additional sources of revenues in addition to the revenue generated by hauling freight across the ocean.  In recent years, one additional source of revenue for these freight companies has been to take on cruise passengers in addition to regular cargo.

Generally there are just 2 – 12 passengers on a cargo ship. Demand for cargo ship cruises is high; travelers need to book months in advance.

Typically, passengers taking a cruise on a cargo (or container) ship will get an air-conditioned room with private bathroom for about $115 per day.  Meals are included; passengers will share three meals a day with the crew. The rooms are cleaned once a week by the ship’s steward. Passengers have to wash their own clothes. Entertainment options include walking or running on deck, playing ping pong or darts, watching or listening to CDs/DVDs, and swimming in the on-ship pool if available on that particular ship. Passengers can disembark at various ports for sightseeing.  Typically a ship makes a 12 – 24 hour stop at each port on its itinerary for the loading and unloading of freight.

International regulations dictate that ships carrying more than twelve passengers have an on-board physician and a small hospital or treatment center. (Crew members, of which there are usually 15 – 25 per freighter, are not considered passengers.)

Questions

1. What costs might be variable with respect to passengers carried on a cargo ship?
2. What costs might be fixed with respect to passengers carried on a cargo ship?
3. What costs and other information would be relevant when the cargo ship company makes its pricing decisions about how much to charge per passenger?
4. Should the ship depreciation costs be allocated to the cost of a passenger cruise when pricing the passenger cruise? Explain.
5. Several news sources state that passengers are “ten times more profitable” than regular freight. Why wouldn’t a freight company decide to take on more passengers and less cargo? How would costs change if more passengers were carried?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.

• Student handout (pdf) (word) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)

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