Tourism and Business Management

This assignment delves into the relationship between tourism and business management. It requires an analysis of how tourism influences local businesses and a deep dive into Cost-Volume-Profit (CVP) analysis within the context of the tourism industry. Students are expected to critically evaluate several research papers on tourism economics, travel behavior, and the impact of tourism policies. The assignment encourages understanding the complexities of managing businesses in the dynamic environment of tourism.

Finance and Funding in the
Travel and Tourism Sector

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Concept of CVP analysis and its importance.........................................................................3
1.2 Pricing methods used by CHTC for determining the charging price from tourists...............5
1.3 Influencing factors of profit...................................................................................................6
TASK 2............................................................................................................................................8
2.1 Different types of management accounting information.......................................................8
2.2 Investment appraisal techniques and their use ......................................................................8
TASK 3..........................................................................................................................................10
3.1 Interpretation of ratios of TUI travel company....................................................................10
TASK 4..........................................................................................................................................12
4.1 Sources of Funding 12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14
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INTRODUCTION
Finance and funding are an integral part of business; it assists to organisations to properly use
opportunities and accomplish its long-term goal effectively. Necessary expenses take place daily
so to manage operations firm is required money. It is very difficult to survive in the crucial
corporate market without sufficient funds. For the present report, The Carib Happy Tours
Company (CHTC) is being taken into account. It is planning for a summer holiday for that firm
is planning to charter an aeroplane for its tourists (Mattson, 2014). The assignment will describe
the concepts of CVP analyses and pricing methods of the entities will be discussed in this study.
The report will focus on investment appraisals techniques for making an effective decision
regarding arranging the whole trip. Ratios of CHTC will be illustrated in this assignment.
TASK 1
1.1 Concept of CVP analysis and its importance
Tour and travel industry is contributing well in the economic development of the country. To
run business company has to invest a huge amount in various activities. Cost impact on the
entities in both ways, excess spending can decrease revenues of the firm whereas controlled
expenditures can enhance overall profit of the organisation. The Carib Happy Tours Company is
engaged in the travel business; several costs are attached to the cited firm are as below discussed:
 Fixed cost: These are such spending which is fixed and do not get changed with sales
and/or production (Huibin, Marzuki and Razak, 2012). Month on month employee of the
firm has to spend money in such kind of activities. As CHTC is operating in the travel
industry, so it needs premises, license, franchise, etc. These all included in the fixed cost,
apart from this cited firm has to pay salaries to staff members, pay utility bills, etc. These
all spending show in the income statement of the company, and if these are high, then it
can negatively impact on the profit of the organisation.
 Variable costs: These are such disbursement which can be influenced by the sales or
production of the entity. Variable costs in CHTC are brochures, packaging cost of the
trip, marketing and advertisement expenses (Wang and Xu, 2014). Apart from this cited
firm has to give the commission to travel agents so that they can work for enhancing the
sales of the organisation. The value of transportation gets changes every time, so
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expenditures related to the arrangement of transportation such as aeroplane etc. are
included in the variable costs of the company.
Cost Volume Profit analyses (CVP)
CVP analyses are process of planning which supports to the management team of CHTC to
predict the future sales, cost, profit, etc. (Shazali and et.al, 2013).
These all elements are interrelated as if sales of the cited firm get increased then the cost can be
managed. But if cost increases then it will impact on the profit margin of the organisation as it
will reduce the earnings of the entity. With the help of CVP analyses, CHTC can manage its
operations effectively and plan to reduce expenditures so that profit can get enhanced. Break-
even points are the essential aspect of this tool, by this way management can identify the point
where they can reach to no profit and no loss stage. The concept of the method is to review the
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Illustration 1: CVP analyses
Sources: (Break-Even Point, 2016)

strength and weakness of the operations o that managers can plan the modifications which can
enhance sales of the organisation (Meng, Siriwardana and Pham, 2013).
For instance as per the given scenario sales price is £800, variable cost per unit is £200,
contribution per unit is £600, fixed cost is £60000 so calculation of break-even point can be done
as following:
= Fixed cost/ contribution
= 100 tourists, so it can be said that if 100 travellers buy the tour package, then CHTC will be
able to reach no profit and no loss stage.
Importance:
 Prediction can be done easily with the help of CVP analyses.
 Changes in visa norms, ticket prices affect the business of CHTC so with the use of CVP,
CHTC can face uncertainties effectively (Wang, 2012).
 As it defines the interrelationship between sales and expenses so, managers of CHTC
can manage its operations accordingly.
 It helps to manage the resources of the cited firm significantly.
1.2 Pricing methods used by CHTC for determining the charging price from tourists
Prices are the main factors if firms do not keep the accurate cost of the tickets then it may be
possible to face loss. CHTC can use several pricing methods to determine the charging prices for
tourists in the trip:
Cost-plus pricing: It is the method in which organisation add the markup value in the actual
incurred cost o get desired profit (Bradshaw, 2013). CHTC has to spend in several activities for
designing the attractive trip for visitors such as accommodation, licensing, marketing, utility
bills, etc. Calculation of cost plus pricing techniques is as following:
Fixed cost 600
Accommodation 200
Total (Fixed +accommodation) 800
For instance markup cost is 20% then 800*20/100 = 160
So selling price will be
=160+800
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= 960
So it can be said that if CHTC sale its tour packages at 960 then it can earn a profit of 20%.
Break-even pricing: It is the method in which firm looks upon the standard point on which it
can come to the no profit and no loss stage. It defines the required sales which are needed to
achieve to the cost of the organisation (Okazaki and et.al, 2014). It can be calculated by using
formula of
=Fixed cost/contribution per unit
= 60000 / 600
100, so it can be articulated that if CHTC sales 100 tickets of the trip then it will be able to
recover it's all costs.
Market-led pricing: It is the method in which CHTC has to consider the environmental factors,
and it has to set its products cost as per the industry guidelines of the entire industry. In this cited
firm has o look upon the buying behaviour, economic condition, Political restriction, etc. In
addition to this, managers have to focus on needs of consumers and accordingly they have to set
their price of the trip.
Target return pricing: It is the concept in which firmly set its products prices in such manner
so that it can meet its sales target of future (Telfer and Sharpley, 2015). The formula for
calculating the pricing:
= Total costs + profit percentage / total sales unit
For instance, CHTC desired profit percentage is 20% then (Sales unit is 100 as per break even
point)
Total return price = 800 + 20% / 100
= 800
1.3 Influencing factors of profit
With the use of given values profit/loss can be calculated:
Costs Costumes Prices Amount
Sales 90 800 (800*90) 72000
Variable costs 90 200 (90*200) 18000
Contribution 90 600 (90*600) 54000
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Given fixed
cost
60000
Profit /Loss -6000
From the above calculation, it can be interpret ate that if 90 tourists to the trip then CHTC will
face the loss of value 6000. By this way it will not be able to reach to its BEP point, 90
customers will not be able for the firm to recover its invested amount (Baral and Dhungana,
2014). So it will have to focus on the increasing number of tourists in the trip so that it can
achieve its objective and can earn profit effectively.
If CHTC wants to earn profit of at least £10,000, then BEP will be (60000+10000 /600)
= 116.67
So it can be said that if CHTC sales the tour package to 117 tourists then it will be bale to
achieve its desired profit which is 10000. So managers of the cited firm have to keep the low
price of its designed products so that more travellers take interest and buy the tickets.
Influencing factors: Competition: It is the main element which impact on the sales of the company. As CHTC
is operating in the travel sector, there are much more rivery brands such as TUI, Cox &
Kings, etc. they all have a great reputation and good market share (Petković and Pindžo,
2012). They offer attractive services to clients by this way they can change their mind,
and that will influence the profit if CHTC to a great extent. Legislation: Visa policies, airport norms, tax regulations, etc. can affect the revenues of
the travel industry to a great extent. If the government makes strict visa norms, then it
will demotivate visitors, and they will not take an interest in travel or holiday by this way
profit of the firm will get reduced. Seasonal variation: In off season people do not take much interest to go on holiday, but
in winter vacations, wedding season they plan to go on trips. In this season's company's
profit gets higher and offseason influence the whole revenue of the company (Winiecki
and Kumar, 2014).
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 Uncertain disbursement: Changes in visa costs, ticket prices, political changes, rates of
accommodation facilities, etc. are uncertainties which can take place anytime. By this
way, profit of the entity gets affected greatly.
TASK 2
2.1 Different types of management accounting information
According to the given scenario CHTC wants to improve its decisions making procedures so
that it can earn a good profit and can gain competitive advantage. There are several methods and
tools which can help to improve its process; these are discussed as below:
Variance analyses: It is the techniques which define the gap between actual and projected
budget. By comparing the both Finance officer of CHTC can identify the reason of higher
expenses and can plan to control over it (Chang, Kauffman and Kwon, 2014). As variance
analyses define the failure's reason so the officer can plan strategies to improve its decision-
making process by this way firm will be able o get higher profit.
Budgeting: It is the great tool which supports the finance officer of CHTC to determine the
actual gap between revenue of the company and cost incurred. It will help to analyse the
unnecessary expenses of the firm so that manager can make effective control over extra
spending. It will help to raise the profit of the entity to a great extent. The budget will assist to
manage the surplus cash in the right direction so that it can raise funds in the organisation. It will
be the better option for the finance officer to improve their decisions by looking at the expenses
and income (Dwyer and et.al, 2013).
Financial statements: it is another tool through which CHTC can improve its decision-making
procedures easily. Officer can compare the liquidity ratio and profitability ratio of the entity with
its previous records and also with competitor brands. It will help to identify the loop fall and to
find out the recent trends. By this way, managers will be able to take effective decisions
regarding designing of tour packages. Thus, the profitability of the company can get increased to
a great extent (Varasteh, Marzuki and Rasoolimanesh, 2014).
2.2 Investment appraisal techniques and their use
CHTC and other tour operators have to invest their money in several activities to raise funds for
the organisations. This investment can enhance the profitability of the company, but on the other
hand, this can create the loss in the firm as well. Investment appraisals techniques support the
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finance officers to take appropriate decisions regarding the investment in a particular project.
Use of investment appraisals techniques as decision-making tools are as described below:
Payback period: It is the method through which finance officer of CHTC can get to know that
investment in which project can help the entity to recover its cost in less time duration. It is very
useful in measuring the risk in investment (Kashima and et.al, 2012). It gives optimistic outcome
to the organisation such as CHTC and others to generate cash inflow in less period.
For example
Year Project A Project B
Cumulative
cash flow of
Project A
Cumulative cash
flow of Project B
0 -20000 -22000 -20000 -20000
1 7000 6500 -13000 -15500
2 6000 6000 -7000 -9500
3 5300 5500 1700 4000
4 6500 7000 4800 3000
5 6000 4500 1200 1500
So for project, A payback period is 2+7000/5300
=3.32
For project B payback period is 2+ 9500/5500
=3.72
So investment in project A will be profitable for CHTC, in this, it will be able to recover its cost
soon.
Net Present Value (NPV): It is the capital budgeting tool which helps to select the most
profitable project in the organisation. The proposal which has higher NPV if CHTC selects such
project then it can gain high profit (Break-Even Point, 2016).
Project A Pv @10% Present value Project B PV @ 10% Present value
Initial
investment 45000 55000
1 25000 0.909 22727 28000 0.909 25455
2 30000 0.826 24793 32000 0.826 26446
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3 32000 0.751 24042 37000 0.751 27799
4 42000 0.683 28687 40000 0.683 27321
5 45000 0.621 27941 47000 0.621 29183
6 0 0.564 0 0 0.564 0
Total 128191 136203
NPV 83191 81203
184.87% 147.64%
This shows that if CHTC invests in project A, then it can gain high profit. It will be profitable
for the cited firm to a great extent.
ARR: Use of accounting rate of return is to identify the accounting profit in the project on
average investment. By this way, manager of CHTC will be bale to improve its process by
making modifications in decisions (Investment appraisal techniques, 2016).
Project A Project B
Initial
investment 42000 48000
1 35000 22000
2 22000 29000
3 30000 30000
4 38000 35000
5 42000 45000
6 0 0
Total 167000 161000
Average 33400 32200
ARR 79.52% 67.08%
TASK 3
3.1 Interpretation of ratios of TUI travel company
TUI is the leading brand and contributing well to the economic development of the county. It
offers attractive tour packages to visitors so that they take interest. Thus, sales of the company
get higher. The performance of the organisations can be analysed with the help of using several
ratios (Petković and Pindžo, 2012).
Ratio analyses of TUI
Ratio Formula 2015 2014
Gross profit ratio GP / Net Sales *100 11.97% 12.17%
Net profit ratio Np/ net sales*100 1.70% 0.56%
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Current ratio Current assets/ current
liability
0.70 0.60
Quick ratio Current assets -
(stock+prepaid
expenses)/ current
liability
0.57 0.47
Debt-equity ratio Debt/ Shareholders
Equity
0.36 0.36
Inventory turnover
ratio
Sales / Inventory 148.24 147.36
Profitability ratio
Gross profit and net profit ratios are included in this. As by looking at the ratios of TUI, it can
be interpret ate that in 2015 its GPR is 11.97%, but in 2014 it was 12.17%. It is ratio is declining
continuously so it can be assumed that sales of the company are decreasing. TUI needs to make
effective controlling its expenses so that it can at least recover its cost against sales. Net profit
ratio of the cited firm is in 2015 is 1.70%, but in 2014m it was 0.56%. So it can be said that net
profit has increased it has reached to 105 to 340 that is why net profit ratio has improved. TUI
performance has improved a little bit; an entity is required to work upon its costing.
Liquidity ratio
The quick ratio shows that in 2014 it was 0.47 but in 2015 it increased 0.57. So it can be
interpreted that TUI is using its resources well. It has adequate sources and can repay its
liabilities on time (Investment appraisal techniques, 2016). The current ratio of TUI shows that
in 2014 0.60 but 2015 it raised to 0.70 so cited firm should remain the same strategies and should
control over its obligation side.
Efficiency ratio
By looking at the results of inventory ratio, it is found that in 2014 inventory turnover ratio was
147.36 but in 2015 it increased to 148.24. So it can be said that managers of TUI need to the
effective decision of utilisation of its assets so that better results can become out. It is found that
company is improving but to sustain in the competitive market it will have to take immediate
decisions for fast growing.
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TASK 4
4.1 Sources of funding
According to the given scenario CHTC is planning to build its own hotel rather arrange a trip in
any other hotel in coming future (Okazaki and et.al, 2014). It will cost around £25 million.
Various sources of finance for the cited firm are explained as below:
Internal sources Retained earning: As CHTC does not distribute its entire income among investors and
shareholders. It keeps some amount safe so that it can face uncertainty in future easily. It
would be a good source of finance for CHTC as this safe funds will easily use by the
cited firm for construction of its own hotel. This is its own funds, so no legal and
financial cost is attached with such kind of source (Telfer and Sharpley, 2015).
 Disposal of assets: The stocks which are removed from the side of a production can be
sold out in the market. This will raise money, and the managers can use such funds in
developing the hotel.
External sources Government grants: As travel and tourism business contribute well in the economic
development, so it can take the support of bodies such as social fund, media and sport to
get monitory benefits. As these give loans to well-performing firms without any tax and
interest, so it will give a huge benefit to the organisation.
 Bank loans: It will be the best option through this CHTC will be able to gather much
amount and can repay it in easy instalment (Bradshaw, 2013).
CONCLUSION
From the above report, it can be concluded that with the help of CVP analyses firms can analyse
the cost against sales. Thus, it can control its expenses and can utilise its capacities effectively.
The assignment has discussed the management accounting information so that budget framework
can be beneficial for the CHTC through this it will be able to monitor its inflow and outflow well
and will be able o improve its decisions to get optimistic results. The report has discussed the
sources of fiance, so retained earnings will be a suitable option for the organisation, by opting
this tool firm will be able to construct hotel easily, and it will not increase its liabilities.
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REFERENCES
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<http://www.myaccountingcourse.com/financial-ratios/break-even-point>. [Accessed on
29th December 2016].
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Investment appraisal techniques, 2016. [Online]. Available through:
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