Cost Volume Profit Analysis and Financial Management

The assignment focuses on the importance of cost volume profit analysis in financial management. It highlights different pricing methods used by organizations to set prices for their products and services. The document also discusses various factors that impact profitability and management accounting approaches such as investment appraisal techniques. Furthermore, it explores internal and external sources for raising funds, which can be adopted by businesses for new projects.

Finance and Funding in
the Travel and Tourism
Sector

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1.1 Cost Volume Profit analysis and its significance in financial management of tour and
travel............................................................................................................................................1
P1.2 Pricing methods that can be used by EUROCARIB to determine price charges................2
M1 Analysis of different pricing methods...................................................................................4
P1.3 Factors which will make impact on the profit of EUROCARIB.........................................4
D1 Desired profits........................................................................................................................5
TASK 2............................................................................................................................................5
P 2.1. Different types of management accounting information...................................................5
M2 How variance analysis helps in improving performance of company..................................6
P2.2 Use of investment appraisal technique as decision making tool.........................................6
TASK 3............................................................................................................................................8
P 3.1 Financial statement of travel and tourism company...........................................................8
M3 Appropriate approaches to management...............................................................................8
D2. Collect and analyse the financial statement of company......................................................9
D3 Critical analysis in whether company is financially stable or not in long term.....................9
TASK 4............................................................................................................................................9
4.1 Various sources of distribution of funding for development of new hotel............................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12
APPENDIX....................................................................................................................................13

INTRODUCTION
Financing refers to a process which provides the financial resources to business in order
to perform business activities, purchasing and making investment. To better understand this
concept in context of travel and tourism company, EUROCARIB TOURS is being selected. This
is a London based European tour operator which focus on Caribbean holidays. In this present
case, EUROCARIB is planning a summer holiday trip to a Caribbean Holiday Resort for one
month. So for this, concept of CVP analysis and its importance in travel tourism business is
being explained in this report. The pricing which can be used by company in order to determine
price is also explained in this project. As there are various management accounting information
and investment appraisal techniques which can be applied by company to improve its
performance is also explained in project. Apart from this, internal and external sources and
distribution of funding for new hotel development has also been explained in this report.
TASK 1
P1.1 Cost Volume Profit analysis and its significance in financial management of tour and travel
Cost Volume Profit (CVP):
Cost volume profit analysis is practice of cost accounting which shows the behaviour of
profits with regards to change in cost and volume. With help of this analysis, EUROCARIB
come to know effect of cost and volume on the profits. This analysis allows managers to
determine breakeven point for various sales volumes and cost structures. The breakeven point is
a situation where company have no profit and no loss. In the financial context, CVP is number of
units of sales required to achieve a targeted operating income. There are several assumption is
being made by CVP that is sales price, fixed cost and variable costs per unit remain constant.
The breakeven point can be understood by taking an example:
Particular Cost
Sales price: $15
Variable Cost: $10
Fixed cost : $50000 per annum
Contribution: Sales – Variable Cost
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= 15 – 10
= $5
BEP: Fixed Cost / Contribution margin
= 50000 / 5 = 10000
To get BEP the company have to sell their plan to 10000 tourists in a year. Then there will be no
loss and no profit for EUROCARIB. As this company can attain to its BEP point in case they
attain a total sale of 800000 during the period of time.
BEV
Sales 800000
Fixed cost 120000
Contribution 600000
BEP 0.2
Sales Contribution BEP
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
BEP Analysis
Column H Column H
Importance of Cost Volume Profit:
The analysis is very useful for management as this gives details about effect and inter
relationship of factors that make impact on probability of business. As at initial in profit planning
this assist managers to ascertain the maximum sales volumes in order to minimise or avoid
losses. And it provides the sales volume at which company's profit goals will be achieved. In the
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dynamic management, the EUROCARIB use CVP analysis in order to analysis the execution of
their short run decisions regarding fixed cost, sales volume and marginal costs (Beeton, 2016).
P1.2 Pricing methods that can be used by EUROCARIB to determine price charges.
Price is a sensitive element for every organisation. There are different pricing strategies
which is used by companies to attract the more number of consumers. The consumers are more
of price concerned so EUROCARIB should be very attentive in order to decide prices for their
tour plans. There are different pricing methods which are discussed below:
Marginal cost pricing:
The marginal cost pricing is an exercise of ascertaining price of product to equal the extra
cost of producing an extra unit of product. Under this method, producer charges for each product
unit sold, only the addition to total cost returning from materials and direct labours. As
EUROCARIB will come to know extra cost which is resulting from additional tourist.
Particular Amount
Sales 900000
Less: Variable cost 300000
Contribution 600000
Less: Fixed cost 120000
Profit 480000
Mark-up Pricing:
Mark up refers to a pricing method in which the fixed amount or the percentage of cost of
product is added to product's price to get selling price of product. It is a common pricing method
which is used by different organisation. For example, EUROCARIB has taken hotel package
from a hotel at cost of 10000 GBP and after than they sell it to their customer by adding mark-up
price in that package that is 15000 GBP. So this can be used by company to generate more
revenues.
Competition based pricing:
Competition based pricing is a practice in which an organisation keeps an eye of their
competitor’s price and the consider their price to set the prices of its own products. As they can
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charge the equal or higher prices than its competitors. EUROCARIB can use this method as to be
competitive in the market and sustainable in market (Sigala, 2012).
Cost Plus Pricing:
The cost plus pricing involves a definitive percentage of profit on cost of product.
Difference between selling and cost in known as profit. As for example the cost of one trip for
EUROCARIB is 20000 GBP and they sell it to their customers at 20% profit. So selling price
would be 24000 GBP.
The company should adopt cost plus pricing method to determine the price to charge
from each tourist. As that price would be 24000 GBP. This is considered as reliable method also.
M1 Analysis of different pricing methods
Price is an important element for everyone whether it is organisation or customer. There
are different methods which is being used by different organisation to determine prices. As these
methods are like cost plus pricing, marginal cost pricing and mark-up pricing method. To
determine price to charge from each tourist, EUROCARIB is going to use cost plus pricing
method. As it is easy to use and simple to calculate also, as this method will enable the company
to determine certain percentage of profit on their product and then sell it customers. The main
advantage of this method is that there is no risk of loss as percentage of profit is pre decided
(Smith, 2012).
P1.3 Factors which will make impact on the profit of EUROCARIB
The profit earning is main aim of every company as but this profit is impacted by various
factors. Profit refers to difference between cost and selling price of a product. This is considered
as an important part for company as one cannot survive without profit. But there are some factors
which can increase or decrease profit of company. Here are some factors which can impact profit
of EUROCARIB is discussed below:
Quality service:
Service is an important concern for the service sectors businesses. As it is very important
for EUROCARIB to provide better and safe services to the customers so customers will feel
delightful. The high quality service can improve customer’s satisfaction and increase profitability
of company and if company provide bad quality service than the result will be vice versa
(Padurean, Nica and Nistoreanu, 2015).
Natural Disasters:
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There are some countries which totally depend on tourism only like Caribbean. If any
country suffers from natural disaster like flood, hurricane and tsunami than tourist stop going
there. And it will be resultant in many local people lost their jobs and companies like
EUROCARIB suffer from losses due to less number of tourist.
Local transportation:
The local transportation of country can have huge impact on the profit of organisation. As
local transportation of country is where tourist is going to visit, if there is high prices of local
transportation in city than the expenses will be more for EUROCARIB and there profit will be
less. Due to high transportation cost number of tourist will be decreased and overall profit will be
less. As if there are low prices than situation can be vice and versa also for company.
These are factors which make impact on profit of companies, so company should analyse
all the factors which influence profits, then according to that should plan trip.
D1 Desired profits
Particular Amount
Number of tourist 90
Sale prices per
tourist 144000
Less: variable
charges 36000
Contribution 108000
Fixed cost 120000
Total number of
profit -12000
As from above calculation this tour is not looking viable for EUROCARIB because the
company is not even earning profit. So there is no chance of earning desired profit. So according
to above numbers company should not organise this tour due to earning loss from this tour. The
company has higher fixed cost and low cost which is resultant in loss for company. Desired
profit which company is looking to earn from this tour is 30000 GBP but instead of earning
profit company have to bear loss if they organise this trip (Chiu and Yeh, 2017).
TASK 2
P 2.1. Different types of management accounting information.
Management accounting information is system which is helpful for internal management
of company. The main aim of this system to provide reliable and authentic information to the
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internal management of company so that they can make effective decision in company. The
management accounting information comes in form of financial ratios, budget forecast, variance
analysis and cost accounting (Pike, Murdy and Lings, 2011). This information which can be
useful for EUROCARIB is discussed as under:
Variance analysis:
Variance analysis refers to a process which compare the actual expenses with standard
expenses. This analysis is helpful in finding the variations between actual and standard expenses
and take corrective action. Managers of organisation always use variance analysis while making
budget. The variance can be positive or negative, if positive variance occurs than it is a
favourable situation for company and if negative variance occurs than it is an adverse situation
for company. For example, EUROCARIB is planning a tour 10 tourist and there estimated cost is
20000 GBP and but actual cost was 18000 GBP so the variance is favourable.
Budget report:
The budget is a technique which is used by organisation in order to maintain the cost at
optimum level. This gives direction to the company regarding their expenses and income for a
particular year. It is helpful for managers of EUROCARIB to compare the performance of
activity with budgeted performance and find out variances and take corrective action (Buckley,
2012).
Financial Statement:
The financial statement is those statement which shows the actual financial position of
company. These statements include the income statement, cash flow statement and balance sheet.
As statement are very helpful for management of EUROCARIB in order to take financial
decisions in firm. As manager can decide the area where they can make future investment on
basis of evaluation of financial information (Keough, 2015).
As these are management accounting information which can be used by company in
order to make financial and strategic decisions in organisation.
M2 How variance analysis helps in improving performance of company
The variance analysis is a tool which used to know the variance between actual cost and
budgeted cost of project. It is used at wider level in organisation. This analysis enables
EUROCARIB to find out deviation or variance in actual and budgeted cost and then accordingly
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take corrective action. It helps the company to improve their performance as by taking corrective
action in the variances.
P2.2 Use of investment appraisal technique as decision making tool
The investment appraisal tools are those which is used by organisation to ascertain the
attribute of an investment. These techniques are very helpful in the evaluation and analysing an
investment which is made by company. As EUROCARIB use appraisal techniques in order to
evaluate quality of their project. These are discussed as below:
Cash flows amount is million
Year Cash flows PV of 10% Present value
0 -25 1 -25
1 12 0.9090909091 10.9090909091
2 15 0.826446281 12.3966942149
3 10 0.7513148009 7.513148009
4 8 0.6830134554 5.4641076429
Total PV 36.2830407759
NPV 11.2830407759
IRR 31.17%
Payback period 2.4years approx.
Payback period:
The payback period is referring to the how long it takes for a project to generate
sufficient cash inflows in order to recover the cost of project. As this is considered as simplest
and easy to use technique. The EUROCARIB is also using this technique to find out the time in
which company will receive sufficient cash flow on their investment. For example, the company
is planning to invest around 25 million GBP for their new hotel. With help of payback it is
expected that after 2.4-year company will cover their total investment. According to the above
calculation, it has been determining that total time for recovering the amount is around 2.4 years.
EUROCARIB can easily be able to attain their interest amount on the initial investments which
is of 25 million.
Internal rate of return:
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This is technique under which cash flows are discounted to know the rate of return on
projects. As it is similar to net present value because in that technique, the cash flows are being
discounted. The higher IRR leads to project is acceptable and lower leads to project is not up to
mark. For example: EUROCARIB is planning to invest 25 million and their internal rate of
return is calculated as 31%. so is a considerable project for company (Gunder and Hillier, 2016).
From the above calculation, EUROCARIB is easily be able to attain a positive rate of interest
with 31% within the set limited period of time.
Net Present Value:
This is known as difference between cash inflows and outflows for a specific period of
time. It is very useful tool to make better decision regarding investment in companies. For
example, as EUROCARIB is planning to invest 25 million in a project for four years. As per the
net present value which was related with EUROCARIB is 11 million after a long time period of
4 years. They are not being able to get a valuable return from their overall investments so they
need to look for some other options that is more suitable for the company in coming period of
time.
TASK 3
P 3.1 Financial statement of travel and tourism company
Trafalgar travel is famous travel of London, United Kingdom. This provides the safe and
luxurious hotels and also provides comfort vehicle for travelling. On the basis of financial
statement of EUROCARIB the ratios like profitability, liquidity and investment is being
analysed and interpreted as below:
Ratio Formula 2017 2016
Current ratio Current assets/Current
liability
181957 / 15307 =
11.89:1
166158/15969 =
10.40:1
Total asset turnover
ratio
Net sales/average total
assets
92682/291431= 0.318 109181/291431 = .374
Return on equity Profit after tax/net
worth
9794/239752 = 0.0408 -511/192563
−0.00265
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From the above chart, it has seen that in 2017 the current ratio is around 11.89 which is
high as compare to last year which is 10.40. The total assets turnover ratio is 0.318 and 0.374
respectively in the both respective years. Similarly, The return they are getting on the equity is
around 0.0404 and 0.00265.
Current ratio:
The current ratio talks about company's current assets over current liability. This shows
how efficiently company is using current assets. The company has current ratio of 2016 is
10.40:1 and for 2017 is 11.89:1 and it can be said that there is very ineffective use of current
assets in order to pay off current liabilities.
Total asset turnover ratio:
This shows the how company's assets are using company total assets to generate more
sales. For the year it was 37.4% and in 2017 it becomes lesser than 2016 which was 31.8%.
Return on equity:
This shows relation of profit and equity of shareholders. As it shows how equity
contribute in the profit. As for year 2016 the company has negative on its equity which shows
there is no contribution of equity to its profits. In 2017 it has contribution of 4% in total profit of
company.
M3 Appropriate approaches to management
Management refers to the art to get done work through others. As there are different
management approaches which is used by company to achieve their goals effectively and
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efficiently. The EUROCARIB can use socio technical system approach which helps to
understand behaviour of a group and an individual also. Apart from this, company also can use
quantitative approach for getting mathematical results and authentic outcomes (Floyd, 2015).
D2. Collect and analyse the financial statement of company.
There is different ratio calculated so the liquid ratio of company has risen up from .38
to .62 which shows a positive point for organisation the current ratio has been declined up to .59
to 2. An ideal current ratio is considered as 2:1. With the help of these ratios one can make
effective decision in organisation.
D3 Critical analysis in whether company is financially stable or not in long term
As the ratios of company shows that the current ratio of company is not so good as there
are ineffective assets lying in balance sheet of company. They should be used properly in order
to pay off liabilities. But company has enough return on its shareholder's equity which is a good
sign for company. There is not much variation in company's ratio so it can be said that it is
financially stable. Thus, company will enough financial resources in forthcoming years.
TASK 4
4.1 Various sources of distribution of funding for development of new hotel
There are different source of funding which can be opt by EUROCARIB in order to
develop there new hotel. As to undertake different business activities it needs enough amount of
funds and for that there are different source that is internal and external source. These are as
follows:
Internal sources:
This refers to the raising funds from their existing assets and regular operations. The
internal sources are describes as below:
Retained earnings:
It is an internal source of raising funds. The retain earning refers to that, company keeps
some portion of surplus for the future uses. So EUROCARIB also can use its retained earnings
for development of new hotel (Chenand and et.al., 2014).
Depreciation provisions:.
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The depreciation provisions is refers to maintenance of a capital stock in order to replace
the existing machinery when it becomes obsolete. This is major internal source which can be
used by EUROCARIB for development of new hotel.
Apart from this company can use deferred taxation and personal funds for making new
investment from internal sources.
External Source:
The external source of funding are outside source of business. As to raise fund from these
source one needs to pay the interest amount also. The different source for EUROCARIB is
discussed below:
Equity Financing:
This is a most important source for financing for companies this shows ownership of firm
and interest of shareholder. The firm can raise capital by selling their shares to investors these
includes:
Ordinary equity shares which can be issued to normal public. And funds can be raised.
And other one is preference share which is issued to special group of public (Byrne, Sipe and
Dodson, 2014).
Debt Financing:
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It is option where fixed payment have to made the lenders is known as debt financing.
These are as :
Bank Loans:
The EUROCARIB can raise the funds from bank by showing proper financial statements
to banks. As company have to some interest on the basis of agreement for some time period.
Corporate Bonds:
The bonds are issued in the corporate so EUROCARIB can raise funds from these bonds
also.
As apart from this, debenture, leasing, trade credit and commercial paper can also be used
by company (Yang and Wong, 2012.).
CONCLUSION
In the conclusion it can be said that cost volume profit analysis is very important for the
financial management of companies. As there are different pricing method which is used by
organisation in order to set the prices for their products and services. There are different factors
which make impacts in the profitability of companies. Various kinds of management accounting
approach and investment appraisal techniques can be used by company for smooth functioning
of organisation. There are internal and external sources for raising funds which can be adopted
by business for raising funds for its new projects.
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REFERENCES
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planners in Fort McMurray, Alberta.Urban Geography.36(8). pp.1169-1196.
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financing through the Regional Operational Programme. Amfiteatru Economic Journal.
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Sigala, M., 2012, October. Web 2.0 and customer involvement in new service development: A
framework, cases and implications in tourism. In Web (Vol. 2, pp. 25-38).
Beeton, S., 2016. Film-induced tourism. Channel view publications.
Smith, K., 2012. The problematization of medical tourism: a critique of
neoliberalism. Developing world bioethics. 12(1). pp.1-8.
Chiu, Y. B. and Yeh, L. T., 2017. The threshold effects of the tourism-led growth hypothesis:
Evidence from a cross-sectional model. Journal of Travel Research. 56(5). pp.625-637.
Buckley, R., 2012. Sustainable tourism: Research and reality. Annals of Tourism Research.
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Yang, Y. and Wong, K. K., 2012. A spatial econometric approach to model spillover effects in
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Online
Intenral and external source of business. 2018. [Online]. Available through:
https://keydifferences.com/difference-between-internal-and-external-sources-of-
finance.html
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APPENDIX
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