Concepts of CVP analysis and Its Importance : Report
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Added on 2020-01-16
Concepts of CVP analysis and Its Importance : Report
Added on 2020-01-16
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Finance and Funding in the Travel and Tourism Sector1
Table of ContentsINTRODUCTION ...............................................................................................................................3TASK 1.................................................................................................................................................31.1 Concepts of CVP analysis and its importance...........................................................................31.2 Analysis Of Pricing Methods in Tourism Industry....................................................................41.3 Factors influencing the profits...................................................................................................5TASK 2 ................................................................................................................................................72.1 Types Of Management Accounting Information.......................................................................72.2 Use of Investment Appraisal Techniques 8TASK 3 ................................................................................................................................................93.1 Financial Statement Analysis.....................................................................................................9TASK 4...............................................................................................................................................114.1 Sources of Funds......................................................................................................................11CONCLUSION .................................................................................................................................12REFERENCES...................................................................................................................................13Index of TablesTable 1: Calculation of Break even point.............................................................................................5Table 2: Calculation of profits at different levels of customers............................................................7Table 3: Calculation of Payback period..............................................................................................10Table 4: Calculation of NPV..............................................................................................................10Table 5: Calculation of IRR................................................................................................................11Table 6: Calculation of Profitability Ratios for Thomas Cook Group PLC.......................................11Table 7: Calculation of Liquidity Ratios for Thomas Cook Group PLC............................................12Table 8: Calculation of Investment ratios for Thomas Cook Group PLC..........................................12Illustration IndexIllustration 1: Cost Volume Profit (CVP) analysis...............................................................................52
INTRODUCTION Finance is of great importance in the business for the smooth functioning of business and tosupport its major projects and expansion. Further, Carib Happy Tours Company (CHTC) engaged inthe tourism industry and conducts trip across the globe. This report conducts CVP analysis of theCHTC and clarifies its importance. Moreover, this report reflects the pricing policies available tothe tourism industry. Later in this report, various investment appraisal techniques are demonstrated.Thomas Cook is selected, and its financial performance is evaluated through ratio analysis.TASK 11.1 Concepts of CVP analysis and its importanceCVP analysisCost-Volume-profit analysis classifies total cost into fixed cost and variable costs. In CVP analysisselling price and the variable cost remains unchanged per unit whereas fixed cost remains constantin total. It depicts the relationship between the cost of operations or number of customers servedand the profit earned by the company. It refers to the break even point where revenue covers all thefixed and variable cost of the business.3Illustration 1: Cost Volume Profit (CVP) analysis.(Source : Cost Volume Profit (CVP) Analysis,2016)
Revenues earned above by the company reflects the profits and below the breakeven are the lossincurred by the company. Table 1: Calculation of Break even pointCarib Happy Tours Company (CHTC)ParticularsAmount in £Sales800Less: Variable cost200Contribution per customer600Fixed cost 60000Break even point (Fixed cost/Contribution per unit)100Therefore from the above table it can be stated that to recover the fixed cost incurred onaccommodation and airfare, 100 customers are to be served. It depicts that if the Carib Happy ToursCompany (CHTC) serves more than 100 customers, it will earn profits and if less than 100customers are served, then it will not be able to cover the cost.Importance of CVP analysis in Tourism companyDecision making is strongly supported by the CVP analysis as it depicts the clear relationshipbetween cost, volume and profits of the company. In the case of tourism company fixed costs aregenerally high and therefore if the fixed costs are not recovered by the revenues generated it willlead to a loss. CVP analysis is crucial in short-term decision making and forecasting the minimumnumber of customers to be targeted at least to recover the costs and avoid losses. This willdemonstrate the expected availability of resources to support the tourism services and thearrangements required(Mowforth and Munt, 2015).Further various combinations can be generated using CVP analysis to maximise the profits ofCHTC. Costs can be controlled and compared with the benchmarks or the industry standardsfollowed. If the CHTC gets success in reducing the fixed cost, it can further improve some profitsby reducing the contributing margin and increasing revenue. Moreover, CVP analysis will provide adetailed analysis of per unit cost varying with the volume which will assist managers of CHTC indecision making. The clear pictures of cost, volume and profits will provide insight into future andhence strong support to prepare budgets ultimately into financial planning.1.2 Analysis Of Pricing Methods in Tourism IndustryThe pricing policy adopted by Tourism company is a blend of marketing strategy and analysis offinancial factors. Further various aspects are to be kept in mind while framing the policy such astarget customers, competitive market, unique services offered, market position of the company,4
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