Cost Volume Profit Analysis and Pricing Strategies

The assignment discusses the importance of cost volume profit analysis in financial management and how it can be utilized for planning holiday trips. It also explores various pricing methods such as mark-up pricing strategy, seasonal pricing, common pricing types, discounting pricing, rack rate, packages deals, and mark down pricing strategy. Furthermore, it examines different management accounting systems like cash flow, sales reports, cost reports, job cost report, budget report, payback period method, accounting rate of return (ARR), net present value (NPV), internal rate of return (IRR), and funding sources for the development of a new hotel.

Finance and Funding in the
Travel and Tourism Sector

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1 ...........................................................................................................................................1
1.1 Concept of CVP analysis and its importance .......................................................................1
1.2 Different pricing methods.....................................................................................................2
1.3 Factors influences on profits ................................................................................................3
TASK 2............................................................................................................................................4
2.1 Different types of management accounting system .............................................................4
2.2 Use of investment appraisal techniques ...............................................................................5
TASK 3............................................................................................................................................7
3.1 Financial statement using appropriate ratio .........................................................................7
TASK 4 ...........................................................................................................................................8
4.1 Sources and distribution of funding .....................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Finance is amount of total of money given to company with expectation to repay as well
as firms are liable to pay back amount along with particular percentage of interest. It is procedure
of acquiring money for business purpose and it is given by financial organisation like banks,
leading agencies etc. On the other hand, funding is activity of giving fiscal resources usually in
kind of money and project by entity (Brett, 2014). There are many sources of funding that needs
by company such as government funds in form of donations etc. This study is based on
EUROCARIB TOURS. It is major London-based European tour operators that focusing on
Caribbean holidays. Tour operator is planning summer holidays trip to Caribbean Holiday
Resort. This report will examine concept of CVP analysis and its importance in financial
management. It will analysis of pricing methods and different factors that influences on profits of
the business.
TASK 1
1.1 Concept of CVP analysis and its importance
Cost Volume Profits Analysis(CVP):
CVP is planning procedure that director utilize to anticipate future volume of action, cost
incurred, sales made and receiving profits. This analysis categorizes all costs as either fixed or
variable. In this context, fixed costs are expenditures that don't move directly with volume of
produced units. On other side, variable cost is changing with level of production. These costs
involve material and labour that go into producing every unit. This analysis utilizes two costs to
tract out level of production and income is connected with every level. If level of production is
raised, smaller percent of total income if fixed costs while remain constant percentage is variable
cost.
In additions to that, there are many elements of analysis of CVP such as volume of
activity, selling prices of units, variable cost per unit, total fixed costs, direct and indirect cost
workforce. The objectives of CVP analysis is calculate profits fairly and correctly as it is
important to know relations among the cost and profits (Jan, 2013). This analysis helpful in
setting up flexible budget that shows costs at different level of actions. It is needed to budget the
volume first for setting budget for sales and variable costs.
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CVP is the management accounting methods that is involved with effect of sales volume
and product cost on operation profits of company. There is basic formula that utilized in CVP
analysis such as:
px=vx+FC+Profit
Where
p= Price per unit
v= Variable cost per unit
x= Total number of unit produced and sold
FC= Total fixed cost
Importance of CVP analysis:
CVP analysis is essential to management as it give perception into effects and inter-
relationship of elements that effect profits of organization. The relation among cost, volume and
profits creates structure of profitability of company. CVP analysis is important to anticipate and
measure significance of its short run decisions regarding fixed, marginal cost, sales volume and
selling price for its profits plan on constant basis. It is important in many ways such as:
 It is essential to determine constant and variable cost. This means it creates premises
about those conditions.
 CVP is important to find the most profitable collection of costs and volume.
 It is crucial to inform decisions about selling of product and services of company.
 It gives overview of planning process of profits of company.
Break-even Analysis:
Break even analysis estates the calculation and determination of margin of safety for an
organization based on revenue gathered and joint costs(Break-even Analysis, 2018). The basic
formula for calculation break-even analysis that is Total fixed cost/unit contribution margin. The
fixed cost of trip is £120000 and contribution is £1200. So that, the Break even analysis is the
£100.
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1.2 Different pricing methods
Pricing setting for every business operators needs strong mix of marketing strategies and
fiscal analysis. In this context, tour operator provide diverse and pricing strategies frequently
develop its brand and market share by making up accommodation and elements. In addition to
that. EUROCARIB tour operator follow different pricing methods for planning of holidays trips.
Such as:
Mark Up pricing strategy: Tour operators determine price for holidays, tours and
activities to ensure that make profits on every sale (Chon and Olsen, 2015). All costs are related
with running of business that involves spent time developing and promoting holiday and
experiences. In order to that, fixed costs involves rent, maintenance of building and insurance.
Variable costs include wages, forces, repairs, costs of promotional and travel.
Seasonal Pricing: Company is to cover low and high seasons throughout different price
level. EUROCARIB apply this price method for school holidays dates for localized events
where dates change every year. In seasonal demand, tour companies to provide for various
levels of demand due to time of year.
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Illustration 1: Break-even Analysis
Source: (Break-even Analysis, 2018)

Common pricing types: There are three common prices such as per person, per unit,
single or double occupancy. In order to that, per person pricing means set cost per person that is
adult and children prices. In per unit pricing, setting of price of 1 unit of the product that is price
per night. This is modular mode to price accommodation (McCormick, 2018).
Discounting pricing: EUROCARIB tour operator follow discounting pricing strategies
that rarely inescapable in competitive market. It can become smooth travelling to reduce
profitability and even missing that vital break-even points. Company is to consider adding
situation in discounted prices like minimal stay or number of travellers in the booking.
Rack Rate: It means full rate before any discounts are utilized and typically is given to
wholesalers and printed on brochures for season ahead. Full rate is more likely to be charges all
time without any daily discounting for activity and attraction operators.
Packages Deals: It is complimentary partners in areas with developing packages. It is
good way to stimulate demand without having to discount with value added elements.
EUROCARIB tour operators can follow this pricing method by giving full package and share
business with each other.
Mark down Pricing Strategy: Tour operators needs to mark down their price in order to
remain competitive. It means generate more booking without promotional discount.
1.3 Factors influences on profits
There are many factors that influence on profits of business. In this context,
EUROCARIB tour operators face many issues regarding these factors that effects on their profits
of holiday trip.
Location: It is main factor that influence on profits. If tour operator plan holiday for
location which is not popular and good for trip, so that there are limited customer interest for this
trip. So that, EUROCARIB tour operators must have planned that location for trip is popular and
famous(Carbone, 2017).
Safety and security: It is also important factors that create issue in planning of holiday
trip. Therefore, EUROCARIB tour operators make sure that safety and security in the destination
for visitors. This helps in increasing attraction of tourists and profitability of business while
planning of holiday trip by tour operator. Safety includes medical care facilities on destination
and security involve terrorism etc.
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Political Factors: It includes higher safety enforcement, travel restriction, raised
sensitivity as controlled by political clearance. So that, EUROCARIB tour operators planning of
those destinations there is nothing these kinds of issues happened. These political factors directly
effects on profits, because there is no customer come on this destination.
Changes in season: Seasonal changes are common stands that affects on profits margins.
According to seasonal changes, tour operators must assess these alterations in order to maintain
profits. Therefore, EUROCARIB tour operators make sure that planning of holiday trip
according to changes in seasons.
Economy condition: It includes inflation rate, foreign exchanges rate, buying power of
tourists etc. that directly effects on probability of business. These issues are effected on planning
of holiday trip by EUROCARIB tour operators(Causevic and Lynch, 2013).
The profit of EUROCARIB tour operators affects on variable cost per £400 and cost
EUROCARIB £120000. If 90 tourists are booked to go trip, so that it increase cost of trip that
directly decrease profit margin of tour operator.
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From the above table fixed cost of trip is £120000 and desired profit margin is £30000.
Selling prices is £1600 and variable cost £400 as well as contribution is £1200. Therefore,
number of tourist need to serve for getting desired profit margin that is £125.
In this context, EUROCARIB tour operators also planning of special events, sporting
events that affects profitability of holiday trip. There are some technological factors includes
communication, online booking of holiday trip etc. affects on profits of tour operator. This type
of holiday trip increase customer awareness and their attraction that increasing profits of overall
business. In addition to that, there are some other issues that includes increasing amount
restaurant, hotel prices, resort prices, number of customer increase that affects on profit margin
of EUROCARIB tour operator. Therefore, tour operators make sure that collect and determine
all prices for effective planning of holiday prices for increasing customer and profits of business.
TASK 2
2.1 Different types of management accounting system
Management Accounting System:
Management accounting system is activity that includes partnering in administration
decision making, devising planning and execution management systems and giving expertness in
fiscal report and direct to help administration in preparation and enforcement of company's
approach. It takes financial data and develop reports for private internal utilize by managers.
Information includes budgeting, break even charts, analysis of cost of product, trends charts and
forecasting(Chenhall, 2015).
Types of management accounting system:
There are many types of management accounting system that use in every business. In
this context, EUROCARIB tour operators utilise these kinds of system for managing accounting
for planning of holiday trip.
Sales reports: This is type of management accounting system that are helpful for
showing sources of revenues of organization. In this report, highlight business activities earn the
income or sales at particular accounts and venues. This can show of sales people are making the
most and least income. On the basis of adjusting staffing or awarding bonuses.
Cash flow: This shows expect money to come in during short and medium term
accounting period. Management accounting report provides monthly summary of income,
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outgoing cash that is showing when to anticipate shortfalls and surpluses (Causevic and Lynch,
2013). This report is more helpful than longer term version because farther out anticipation.
Cost reports: If company is to understand and determine all types of costs that help
business is most profitable. In this report, break down labour, material and other expenditure
such as fees and licenses based on these expenses contributes to various kinds of earning. This
data is useful for defining which aspects of business merit added investment, building on their
possible for raised profits. Thus, EUROCARIB tour operator utilizes this report to know about
cash inflow and outflow for planning of holiday trip.
Job cost report: This report show expenses for particular project financed by small
business. They are normally matched with estimate of revenue for evaluating job profits. This
assists in determine higher earning fields of company, so that they direct additional efforts rather
than of desert time and money on jobs with low profits margins.
Budget report: This report assist analysis business execution and director analysis their
division's execution and control cost. Calculation of budget for period is normally based on
actual expenditure from preceding years. Therefore, EUROCARIB tour operator utilize this
report for calculation of budget for planning of holiday trip (Coshall,2015).
2.2 Use of investment appraisal techniques
Investment appraisal techniques that help as tool of decision making in business. In this
context, EUROCARIB tour operator use different techniques of investment appraisals technique
for decision making of holiday trip. Such as:
Payback Period Method: This technique takes for project to create enough cash inflows
to break even and recover cash outlay required to initiate task. This technique identifies
improvement of original capital invested in work. The length of time this process takes gives pay
back period yearly until cash inflows balance to amount of primary investment. In simple word,
it can be determined as number of years needed to regain the cost of investment (Chon and
Olsen, 2015).
Accounting Rate of Return(ARR): It is also called as return of investment and return of
capital employed. This method applying normal accounting method to assess enhance in profit
expected to result from an investment by explicated net accounting profits increasing from the
percent of capital investment. There is particular formula for calculation of ARR.
ARR= Average annual profit/average or initial investment*100
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Average Investment= Initial Investment+Salvage Value/2
Net Present Value(NPV): This technique is determined by taking all cash flow that arise
as result of project and discounting them to identify their present value. The present value of all
expected cash outflows must exceed to make wealth(Carbone, 2017). NPV is acquired by
discounting all cash outflows and inflow concept to capital investment task by selecting percent
that is company's weighted averages cost of capital. There is specific formula for calculation of
NPV.
1/(1+r)n
Where
r=rate of interest per annum.
N= number of year over discounting
Internal Rate of Return(IRR): IRR is percent discount rate utilise in capital investment
appraisals that brings the cost of projection and its upcoming cash inflows into equation. It is
charge of return that compare present value of evaluated net cash flows with sign outlay. There is
specific formula for calculation of IRR. It is compared with coveted rate of return to determine
acceptance of project. It is also known as cut off rate for acceptive investment proposals.
Cash Inflows/Cash Outflows = 1
P.V. Of Cash Inflows – P.V. Of Cash Outflows = 0
The element indicates similar relation of investment and cash inflows as in case pay back
process. Formula:
F= I/C
Where
F= Factors to be located
I = Original Investment
C = Average cash inflows per year.
TASK 3
3.1 Financial statement using appropriate ratio
Ratio Formula 2016 2017
Gross Profit Gross profit /sales *100 11.1 10.8
Net Profit Net profit /sales*100 6.04 3.48
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Current Ratio Current Assets/Current Liability 0.74 0.66
Quick Ratio Quick Assets/Current Liability 0.38 0.50
Dividend Pay-out Dividend / Net Income 114.3 69.3
Earnings Per
Share
Net profit/total number of shares
outstanding
1.77 1.10
Profitability Ratio: This ratio is utilized to measure ability of company to create income
as compared to its expenditure and other costs connected during specific period. It includes gross
and net profit ratio. This helps in final execution of firm. Gross profit ratio evaluates marginal
profits and segment revenues of firm. In net profit ratio, assess whole profitability of firm
considering direct and indirect cost (Causevic and Lynch, 2013).
Liquidity Ratio: This ratio is used ability to pay off its debt and the become due. It
includes current and quick ratio. This ratio effects credibility of firm and credit rating of
business. Current ratio assess financial strength of firm treated as 2:1 as ideal ratio. In quick
ratio, assess liquidity of firm treated as 1:1 as ideal ratio.
Investment: It includes dividend pay-out ratio and earning per share. For calculation
investment, company needs to net profit and dividend.
Therefore, TUI tour operator utilize all these ratios for determine profitability, credit
rating and investment in the business. These ratios help in increasing ability and improving
execution of company. With the help of it, firm need increasing profits and income of
competitive advantage in travel and tourism sector. Through it, company determine assets and
liability as well as sales of company (Carbone, 2017).
TASK 4
4.1 Sources and distribution of funding
The producing and distributing products and services is the commercial activity to final
customer for profits. Firm needs money to undertake different works in business. So that, they
are taking funds from both sources that is internal and external sources.
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Internal Sources of Funding:
Company is acquiring funds from different sources such as sales of stock, sale of fixed
assets, retained earnings, collection of debt etc.
Sale of Stock: It is internal source of funding that means operator of company sale their
stock for funds. With the help of it, EUROCARIB tour operator easily developing their new
hotel in Caribbean. So that, it is requiring funds for business expansion.
Sale of fixed assets: It is also internal source of funding that means owner of business
sale their fixed assets for getting funds (Causevic and Lynch, 2013). Through it, EUROCARIB
tour operator easily developing their new hotel in Caribbean. So that, it is requiring funds for
business expansion.
Collection of debt: It is also internal source of funding that means operator of firm
collect debt from previous and present debtors for getting funds. With the help of it,
EUROCARIB tour operator easily developing their new hotel in Caribbean. So that, it is
requiring funds for business expansion (Brett, 2014).
Retained Earning: It is internal source of funding that means reinvestment from
shareholder of business for acquiring funds. Through it, EUROCARIB tour operator easily
developing their new hotel in Caribbean. So that, it is requiring funds for business expansion.
External Sources of Funding:
EUROCARIB tour operator is getting funds from various external sources such as bank
loan, financial institution, investors etc.
Bank Loan: It is external source that means owner is getting bank loan for requirement
funds. They liable to pay back by instalments along with interest. Through it, EUROCARIB tour
operator easily developing their new hotel in Caribbean. So that, it is requiring funds for business
expansion (Chenhall, 2015).
Financial Institution: It is also external source that means acquiring funds from various
financial institutions by company owner. With the help of it, EUROCARIB tour operator easily
developing their new hotel in Caribbean. So that, it is requiring funds for business expansion.
Investors: It is also external source that means operator getting money from their
investors. With the help of it, EUROCARIB tour operator easily developing their new hotel in
Caribbean. So that, it is requiring funds for business expansion.
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CONCLUSION
This report has summarised that meaning of cost volume profit analysis and its
importance in financial management. It can be concluded that EUROCARIB tour operator has
utilized different pricing methods such as mark-up pricing strategy, seasonal pricing, common
pricing types, discounting pricing, rack rate, packages deals, mark down pricing strategy for
planning of holiday trip. It can be discussed that various factors effects on profits that involves
location, safety and security, political factors, changes in season, economy condition etc. It can
be analysed that various kinds of management accounting system that includes cash flow, sales
reports, cost reports, job cost report, budget report etc. Furthermore, report has completed that
utilization of investment appraisals techniques that involves payback period method, accounting
rate of return (ARR), net present value (NPV), internal rate of return(IRR) for planning of
holiday trip by EUROCARIB tour operator. It can be concluded that tour operator utilise internal
and external source of funding for development of new hotel.
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REFERENCES
Books and journals
Brett, P. 2014. The development of tourism, Tourism Management. 13 (1). p.5.
Chon, K.‐S. and Olsen, M. D. 2015. Applying the strategic management process in the
management of tourism organisations, Tourism Management. 11 (3). pp.206‐13.
Carbone, F. 2017. International tourism and cultural diplomacy: a new conceptual approach
towards global mutual understanding and peace through tourism, Tourism Review. 65
(1). pp.61-74.
Causevic, S. and Lynch, P. 2013. Political (in)stability and its influence on tourism
development”, Tourism Management. 34 (15). pp. 145-57.
Ahrens, T. and Chapman, C.S. 2016. Management accounting as practice, Accounting,
Organizations and Society. 32(1/2). pp. 1-27.
Chenhall, R.H. 2015. Management control systems design within its organizational context:
findings from contingency-based research and directions for the future”, Accounting,
Organizations and Society. 28(2/3), pp. 127-168.
Coshall, J. 2015. The threat of terrorism as an intervention on international flows, Journal of
Travel Research. 42 (1). pp. 4-12.
Online
Break-even Analysis, 2018. [ONLINE]. Available through. :
<https://www.accountingformanagement.org/break-even-point-analysis/>.
Jan. I., 2013. Cost Volume Profit Analysis. [ONLINE]. Available through. :
<https://accountingexplained.com/managerial/cvp-analysis/>.
McCormick. M., 2018. PRICING STRATEGIES FOR TOUR OPERATORS. [ONLINE].
Available through. : <https://blog.blackcurve.com/pricing-strategies-for-tour-operators-
and-online-travel-agents>.
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