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Introduction

Finance is the soul or imperative element of both the profit-motive or service-rendering organization as none of the entity can survive in the tough market place without having enough money. The present assignment report will present significance of various cost and managerial decision-making technique like marginal costing, CVP analysis, variance analysis, budgeting and many others to make solid decisions for the growth of enterprise. Furthermore, the report will also investigate that how capital budgeting technique can be incorporated to make solid investment decisions. Along with this, in the last, report will present various source of funding consisting both internal and external such as debt, equity, governmental funding, retained profit and other to meet out CHTC’s financial requirement to construct a new hotel.

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TASK 1

1.1

Cost is one the important aspects used by the management in order to fulfill their requirements as an entity spend money for buying raw materials. A travel operator has used variety of cost in order to uplift their existing business conditions in order to attract wide number of customers. There are various kinds of cost involved in the business of Carib Happy Tours Company which deals in providing travel related services which are given as below:

Fixed cost- The cost incurred in the business which will not get affected with the changes takes place in the existing units produced by an entity. The fixed cost will remain the same at zero level of tour packages offered by this entity. The fixed cost for this entity will be the cost of the accommodation services provided to all its customers (Zhang, Bu, Wang and Hou, 2016). The tourists are offered with the unique services by designing additional and all other basic services delivered to the variety of clients. The utilities bill incurred in the business related to the premises of the travel and tour operator and licensing cost and franchisee cost of operating travel and tour related services.

Variable cost- These kinds of cost will get changed with the increase or decrease in the sales level currently produces by an entity. The variable cost in this particular sector can range from different things which will be affected with the changes occurred in the sales level of an entity. The variable cost for the travel operator includes brochures, tour packages cost, marketing and sales related services. It also includes the commission given to all the agency workers who will be appointed for selling all kinds of services among the variety of customers.

Cost Volume Profit analysis

It is important aspects used in the managerial accounting in which the trio component is interrelated with each other by explaining its dependence on each other (Davis, Vedder and Stone, 2016). The increasing cost will reduce the profit of an entity and vice-versa. The primary aim of this analysis is to equalize all the total cost incurred by the business entity with all the sales and the revenue generated by the business entity. The important aspects of this analysis are to be explained with the help of break even analysis which showcase that point at which an entity will experience no profit or loss in a particular year. The break-even point of above entity is mentioned below which helps an entity in order to make good business decision which are given as below:

Particulars

units price /amount

Sale price

£800

Variable cost per unit

£200

Contribution per unit

£600

Fixed cost

£60000

Break-even point= Fixed cost/Contribution per unit

=£60000/£600

=100 tourists

From the above mentioned analysis which states that an entity will incur no loss or profit when 100 tourist will take all the tour packages offered by this entity (Carroll and Smith, 2016). The above results show that the total cost incurred by the business will get equal with its revenue when 100 tourists will take their services in terms of tour packages.

Importance of CVP analysis

  • This analysis is an integral part of the overall business as it plays a significant role in managing the existing financial resources in order to predict its future expenses.
  • The uncertain factors such as cost of visas and the changes takes places in the development of ticket prices is essential in order to administer the existing financial resources utilized by an entity in their business.
  • This is regarded as important tool in making decisions in order to help all its manager in improving its efficiency.
  • It helps in forming adequate relationships among different variables such as cost of sales and expenses which play major role in increasing or decreasing the profit of the business entity.
  • The segregation of the cost into various categories such as fixed and variable cost which play important role in an entity.

1.2

Pricing is another important tool used by an entity in order to please their customers as this factor changes the overall attitude of an individual before purchasing anything especially tour packages (McLean, 2014). The quality and the prices of the tour packages will influence the decisions of the buyers. A travel operator need to develop their prices which reflects its internal capabilities in order to lure the variety of external customers. There are various pricing methods used by CHTC in attracting customers by setting the cost of trip to cater the needs of different individuals which are given as below:

Cost plus pricing- The profit is the primary aim of an enterprise which needs to be incorporate while designing its packages. The specific markup cost will be included in the pricing of tour packages developed along with all kinds of cost incurred by the business. The different cost incurred in this business includes accommodation costs, rent of premises, utilities bill, licensing and franchisee cost, marketing and sales, commission.

Particulars

Cost per customers

Fixed cost

 

Accommodation

600

Variable cost

200

Total cost

800

Mark up cost@20%

160

Sale price

960

Break-even pricing- The pricing developed by this entity will as per the break even point determined at which the firm will no profit or loss as the sales done by an entity will meet its cost. This kind of pricing will be adopted by this organization whose major focus is on meeting all of its cost takes place in their business which created burden on an entity. The travel operator will choose this approach in order to meet all kinds of cost takes place in their business.

Break-even event point = Fixed cost/Contribution per unit

Market led pricing- The travel and tourism sector is one of the part of overall hospitality industry which guides its several branches (Katsinas, 2015). The business need to develop its prices according to the needs and the expectations of the customer lies in the outside business entity. The priced average decided by the overall industry needs to be accept by the organization who run under the assistance of the overall industry. The external market trends and buying patterns of all individuals need to be considered.

Target return pricing-The primary aim of an entity owner to earn specific return over the period which enhances the existing goals and the objectives of an enterprise. This pricing method will be based on future target return achieved by an entity in near future. The existing capabilities of an organization in terms of using its existing financial resources in order take risk of setting higher prices.

Target return price = Total costs + (Desired Profit %)/Total sales in units

Target return pricing

Particulars

Amount(Values in £)

Total cost

 

Fixed cost

600

Variable cost

200

Total cost

800

Sales units(Number of tourists)

100

Profit %

20.00%

Target price

800

1.3

Particulars

Number of tourists

Unit price

Amount

Sale

90

800

72000

Variable cost

90

200

18000

Contribution per unit

90

600

54000

Fixed cost

 

 

60000

Profit/loss

 

 

-6000

It has been observed from the above break-even analysis applied on the results obtained by an entity in order to develop their prices to attract wide number of customers (Benson and Marks, 2016). The current number of tourist count to whom all kinds of tour packages offered to the variety of customers. The current level of customer base of an entity will not generate high amount of profit for the business as this will result into the loss of 6000 at this particular level.  The current level of units will be able to generate loss as the existing units of the sale in terms of the number of tourist are low as compared with the break-even point. The BEP unit is 100 and the current level of tourists is low which will result into the amount of loss of 6000.

Particulars

Units/Amount

Fixed cost

60000

Desired profit

10000

Contribution per unit

600

BEP

116.67

The CHCT travel and tour operator wants to earn desired profit of 10000 in order to attract wide number of customers by offering variety of services in terms of unique design and additional services of the tour packages (McLean, 2014). The uniqueness in the tour packages will be maintained by keeping low prices and the high quality of products or services offered to the variety of customers. The company wants to earn the desired profit of 10000 which helps an entity in order to determine the number of tourist count. This number of tourists will increase the existing profit of an entity. From the above analysis it has been observed that the business need to serve to 117 number of customers approximately in order to earn this desired target return over the years.

Factors influencing profit in travel and tourism sector

Competition- The existing competitors in the external market will affect the decision of an entity in order to develop their pricing. The biggest competitors in the travel and tourism sectors are TUI Travel and Cox&Kings who increases or decreases the level of competition. The additional services such as complimentary accommodation services and others like offers and discounts (Katsinas, 2015). These offers will change the behavior of an individual towards the business entity by booking travel related services. This factor will affect an enterprise in terms of overall market captured by one entity which in turn affected another business.

Legislation- A travel operator need to follow all the rules and the regulations in order to maintain their existence in the existing market. The travel operator need to fulfill external legal environment requirements by complying with all kinds of requirements. These laws are related with health and safety of an individual during the whole journey, licensing requirements, franchising and royalty agreements.

Marketing- The important aspects used by an enterprise in order to reflect their internal capabilities of the business entity. The marketing can be done by using the best suitable approaches by offering additional discounts. The development of the website of the company is essential as it will gather all kinds of the online as well as manual traffic of audiences. The advertising can be conducted by presenting the existing business resources. The advertising can be more attractive and pleasing in order to gain higher customer satisfaction (Canuto, 2014). The approach used by an entity is very indifferent to change the attitude of all kinds of person by offering variety of services. The adverting will be done through various modes such as television, newspapers and billboards. These forms of advertising will appeal all the users to purchase the products at lower prices as their primary motive is to gain higher  interest among the customers.

Demand- The market demand generated in the existing market will be helpful for an entity in order to gain higher market share. The demand of all the customers will get changed with the existence of the wide number of competitors who are offering variety of products in affordable pricing. The demand needs to be maintained in the existing market in order to gain the high level of customer satisfaction.

Price discrimination- The discrimination in the prices will be formed among the existing business entity which will further created external pressure on the business (Sweetland,  2014). This kind of discrimination will be done which helps an entity in order to gain higher base of customers held with their entity in order to rule the existing business enterprise. This form of differentiation in the pricing will be done on different factors selected by an enterprise.

Uncertain expenses- The different kinds of expenses will be incurred in the business entity in near future that affects an entity's business performance (Baker, 2016). The expenses such as visa cost, changes in the ticketing cost, accommodation rates set by the hotels, changes in the itenary supplied to all the user with the external changes. The changes created in the advance booking tour packaged by the variety of customers which spoils the brand image of an entity and lose their existing and all other potential customers held with an entity. The business relationships need to be formed in order to maintain the relationships with the customers for long time.

TASK 2

2.1

Presented scenario stated that CHTC’s managers are concern about their decision-making procedure and wants to bring necessary improvements in the same by incorporating various updated and modern decision-making practices and techniques. In order to improve decision-making process, there are several best tools and methods available that are enumerated underneath:

Budgeting framework: This decision-making tool can be utilized by CHTC’s CFO to make projection about the outcome of potential activities and day-to-day functions. It is considered as the best technique that works as a warning indicator and aware manager about the upcoming threats and challenges (Ladd and Goertz, 2014). The key benefit of is it helps to determine net results by knowing the surplus of total revenues over total expenditures. By applying this tool, CHTC’s financial manager can create a spending plan for their money and allow firm to make a enough fund by balancing both the revenues and spending. Owing to this, different kind of budgets like production, labor, material purchase, cash, marketing and others can be constructed to present an idea about the results of ordinary course of actions.

Variance analysis: It is a managerial tool that is often used as a budgetary control tool. This is because; it evaluates CHTC’s original performance by computing variances with the planned or targeted goals (Sweetland, 2014). It may be of two types that are favorable as well as unfavorable variances. Former depicts that actual revenues are higher and expenditures are comparatively lower than targeted, however, latter indicates poor performance just because of lower inflow and excessive spending as compare to the anticipated goals. Effective comparative analysis of target with the actual outcome provides huge assistance to the CHTC to determine the reasons for failure. As a result, better policies, strategies and remedial decisions can be taken to get the desired results or output in the future period.

2.2

Many-times, travel and tourism companies like CHTC and others have to make long-term investment like buying new technology, machinery, building and other fixed assets. All the investment proposal requires huge money to be invest in the project, therefore, it seems very essential and important for the business to determine the most suitable or appropriate alternative, that leads to bring success to the firm.

Capital budgeting, also termed as investment appraisal techniques provides CHTC extreme help to assess strength as well as weakness associated with the different project in order to determine the most trustworthy or higher yielding project (McLean, 2014). It is categorized into two parts, that are discounted and non-discounted techniques, discussed as under:

Payback period: This tool is extremely used in situation, where liquidity gains major concern or preferences by the investor due to lack of money. It is a very straightforward tool that identify that what time a project will require in recovering its initial investment quicker by generating higher cash flows specially in the beginning project life.

Accounting rate of return: As name implies, ARR simply estimate project’s future return on their initial cash outlay, also called initial investment. It is an accounting technique that makes use of accounting profit reported under the profit and loss account to quantify the % of return on initial investment (Pistor, 2013). The decision rule of the method suggests that CHTC only should accept a project if it’s ARR is equal to or above than set targeted rate.

Net present value: It seems as the most effective measure or tool of capital budgeting that considers present value of cash flows till the end of the project life duration. The decision criteria of this rule denote that CHTC must go to select that project which has positive plus higher NPV over the other. This technique is highly used by the investors

Internal rate of return: IRR identifies rate of return that is offered by a project irrespective to that of required return. Alternatively, it is that rate at where discounted value of cash inflows and cash outflows will be same at zero NPV. Likewise, the decision criteria of NPV, this method also suggest CHTC to select that project which indicates higher IRR.

Year

Project A

Project B

Cumulative (A)

Cumulative (B)

Discounted factor @10%

PV (A)

PV (B)

Initial investment

-400000

-400000

-400000

-400000

1

-400000

-400000

1

102000

96000

-298000

-304000

0.9091

92727.27

87272.73

2

146000

128000

-152000

-176000

0.8264

120661.2

105785.1

3

210000

163000

58000

-13000

0.7513

157776.1

122464.3

4

238000

205000

296000

192000

0.6830

162557.2

140017.8

IRR 

23%

16%

 

 

 NPV

133721.7

55539.92

PBP (A) = 2 + (£152,000/£210,000)

= 2.72 year

PBP (B) = 3 + (£13,000/£205,000)

= 3.06 year

ARR = (Average annualized profit/initial cash outlay)*100

A = (£696,000/4)/ £400,000*100

= 43.5%

B = (£592,000/4)/ £400,000*100

= 37%

Recommendation:

Considering the net results, it can be seen that project A has less PBP of 2.72 year and higher ARR of 43.5% over project B. Moreover, DCF method also reveals that this project will have higher NPV and IRR of £133,721.7 and 23% whereas project B has less NPV and IRR of £55,539.92 and 16% considers project A as viable and profit worthy, henceforth, investment should be made in that particular project.  

TASK 3

3.1

UK is one of the famous tourist destination across the globe, at where, number of tourists came every year (Ferguson, 2014). There are number of tour operator that offers excellent tour packaging services to the visitors, TUI travel Groups is a global or leading traveling British tour operate that serves global customer base. Its monetary performance can be quantified and measured by using ratio analysis framework.

Ratio analysis is a financial performance evaluation technique, wherein, various ratios are computed to find out the relationship among several components of the annual financial reports. Computation of profitability, efficiency, liquidity (short-term payment) and solvency ratios helps to evaluate each and every element of final reports that are presented here as under:

Profitability analysis

Gross profit margin (GPM) ratio depicts percentage of gross profit over total sales revenues, however, net profit margin (NPM) quantify net return % on total turnover. In 2015, TUI’s GPM dropped down to11.97% whilst NPM came high to 1.70%. Declined sales performance is the key reason behind less gross margin; however, stronger control to daily spending like administrative and other operations has resulted in more net return as it got improved from 105 to 340. It can be interpreted that TUI’s performance shown a little bit increment over the earlier year.

Liquidity analysis

CR delivers information about the proportion or mix of current assets and current liabilities whereas QR guide us management about their liquidity position without considering inventory position (McLean, 2014). Rising CR from 0.60:1 to 0.70:1 whilst decreased QR from 0.47:1 to 0.57:1 denote that TUI Group maximized their resource availability to make their deferral payments to the creditors and other short-term liabilities on right time. In short, liquidity position of the firm got improved in this year.

Efficiency analysis

This ratio is used to quantify that whether TUI Group has improved its capability or not to optimally utilize their business assets. Referring the stated scenario, inventory turnover ratio got improved from 147.36 times to 148.24 reflects that managers of the business took several decisions to utilize their assets in the best manner to gather higher revenues. It is a positive sign that denotes improvement in business efficiency to utilize corporate assets.

Solvency analysis

Solvency ratio is incorporated to analyze the corporate capacity to bear financial risk. TUI Group makes use of fixed versus flexible capital sources to meet out their long-term capital requirement. Debt to equity ratio gains utmost importance to examine and evaluate the composition of capital mixes in the form of either equity or debt resources (Ferguson, 2014). Referring the scenario, Debt to equity ratio remains constant to 0.36:1 because % increment in the debt is equal to the % increase in shareholders’ equity. Ideal ratio of debt to equity is 0.5:1 that demonstrates the appropriate mix of debt to equity in the capital structure. On the basis of this, tour operator can be suggested to maximize their debt resources to some extent till, D/E ratio does not reach to the standard level of 0.5:1.

Shortcomings of ratio analysis

  • This method cannot be used for the qualitative analysis such as staff turnover, consumer satisfaction and many others; however, they are also as important as financial performance.
  • It does not take into consideration any alteration in accounting rules, principles, policies and conventions, as a result, may lead to make incorrect or wrongful decisions.
  • It only helps to measure historical performance of TUI Group and cannot be utilize to predict the results of future course of actions.
  • Cyclical fluctuations, changes in external market volatility, inflation movement etc. are also not consider by this method and as a result, misleading results can be drawn.

TASK 4

4.1

In order to plan future trip, CHTC is thinking to construct a new hotel at Caribbean rather than hiring it. For this, company has an appropriate or suitable construction site available and it has been predicted by the manager that the new project will need an investment of 25 GBP million. For such purpose, CHTC can generate money by employing either the internal or external source of finance, which has been presented as under:

Internal financial source:

Retained profits: Entrepreneur does not distribute their all the earnings to the investors as return and remains some proportion of their net return in the business for safeguarding against potential threats (Ladd and Goertz, 2014). Thus, CHTC can utilize the available retained profits to finance their new hotel construction project. The key advantage of this is money is available without any legal compliance and financial cost.

Disposal of assets: Disposable non-current assets that are removed from the production can be decided to sale in the market and thereby generated money can be invested by CHTC to construct a new hotel at Caribbean.

External financial source:

Equity capital: There are two type of shares can be issued by CHTC that are preference and ordinary (equity) shares. In the former, company will be accountable to pay a fixed rate of dividend on an annual basis. However, it is not so with the equity capital, but still, they have voting rights which can be used by the investors to alter the decision.

Debt capital: The requirement of long-term capital can be meeting out by external borrowings from financial institutions like commercial banks (Frey and Kerl, 2015). In return, debt-holders charge an interest rate as a cost of bearing risk, higher the loan rates increase monetary burden to the CHTC to borrow the money. On the other hand, it provides tax benefits because HMRC consider the amount of interest paid as an allowable expenditure and provided deduction to the establishment which helps to minimize tax burden. Along with the same, in order to secure fund, excessive legal formalities like collateral security by giving assets on charge may be required.  

Government grant: British government also promote travel and tourism sector by taking various actions and policies in order to maximize GDP (Baker, 2016). Distinguish statutory bodies like European Social Fund, Ministry of Culture, Media and Sport and many others provide monetary support to the corporation in different terms like interest-free loan, tax incentives and so on to meet out their financial requirement appropriately. It is the prior condition of the loan is that CHTC must use the money within the time period and purpose of grant otherwise; it can be get back or taxed as well.

Conclusion

Aforementioned report summarized that CVP analysis is of extreme importance that helps to reach at the point of maximum capacity utilization and after this point deliver return to the firm. Moreover, budgetary framework has been considered as a best tool that will assist CHTC’s CFO to control excessive spending by monitoring of daily functioning. Furthermore, capital budgeting method identified project A more viable. In addition, TUI Group’s financial performance analysis identified that company has to make several strategies and decisions to maximize their profitability and solvency position. In the end, loans and retained profits are considered as an effective source of the fund to meet the long –term requirement of CHTC.

References

  • Baker, B. D., 2016. School Finance & the Distribution of Equal Educational Opportunity in the Postrecession US. Journal of Social Issues. 72(4). pp.629-655.
  • Frey, R. and Kerl, C., 2015. Multinational banks in the crisis: Foreign affiliate lending as a mirror of funding pressure and competition on the internal capital market. Journal of Banking & Finance. 50. pp.52-68.
  • Ladd, H. F. and Goertz, M. E., 2014. Handbook of research in education finance and policy. Routledge.
  • Ferguson, E. J., 2014. The power of the purse: A history of American public finance, 1776-1790. UNC Press Books.
  • Pistor, K., 2013. A legal theory of finance.Journal of Comparative Economics. 41(2). pp.315-330.
  • McLean, C., 2014. Market managers and market moderators: Early childhood education and care provision, finance and regulation in the United Kingdom and United States. Journal of European Social Policy. 24(2). pp.122-134.
  • Katsinas, S. G., 2015. Access and Finance Issues: The University of Alabama’s Education Policy Center. Community College Journal of Research and Practice. 39(10). pp.938-942.

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