FINANCE AND FUNDING IN TRAVEL AND TOURISM INTRODUCTION
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FINANCE AND FUNDING IN TRAVEL AND TOURISM INTRODUCTION 1 TASK 1 1 1.1 Explain the importance and cost and volume in financial management 1 1.2 Analyze pricing methods in travel and tourism sector 4 1.3 Analyze factors influencing profit level 5 TASK 2 5 2.1 Explain different types of management accounting information in travel and tourism business 5 2.2 Assess the use of management accounting information as a decision making tool 6 Attached in PPT 6 TASK 3 6 3.1 Interpreting travel and tourism financial accounts 6 TASK 4
FINANCE AND FUNDING IN TRAVEL AND TOURISM INTRODUCTION
Added on 2020-06-05
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FINANCE AND FUNDING INTRAVEL AND TOURISM
Table of ContentsINTRODUCTION...........................................................................................................................1TASK 1............................................................................................................................................11.1 Explain the importance and cost and volume in financial management................................11.2 Analyze pricing methods in travel and tourism sector...........................................................41.3 Analyze factors influencing profit level.................................................................................5TASK 2............................................................................................................................................52.1 Explain different types of management accounting information in travel and tourism business........................................................................................................................................52.2 Assess the use of management accounting information as a decision making tool...............6Attached in PPT...............................................................................................................................6TASK 3............................................................................................................................................63.1 Interpreting travel and tourism financial accounts.................................................................6TASK 4............................................................................................................................................84.1 Analyze sources and distribution of funding for the capital projects....................................8CONCLUSION................................................................................................................................9REFERENCES..............................................................................................................................11
INTRODUCTIONEvery business whether operates in profit motive firm or service rendering organizationneed money to operate their functions successfully with no hazards. Although there arenumerous choices available to an entity for fund acquisition such as bank borrowing, debenturesand equity, still, making an appropriate balance among all is necessary for managing solvency.Merlin Entertainments Plc (MEP) is a UK based entertainment organization that is currentlyoperating at around 115 tourist attractions in above 23 countries. The present report targeted atpresenting the use of various popular managerial techniques such as pricing decision, costvolume profit relationship, budgeting, ratio analysis and others. Moreover, lastly, it will presentsources of funds from where business can extract required amount of capital for satisfying theirmonetary need. TASK 11.1 Explain the importance and cost and volume in financial managementMerlin Entertainments Plc (MEP) is a UK based entertainment organization that is currentlyoperates in 3 segments, Midway Attraction (indoor attractions in city), Resort Theme Parks(accommodation, rides and shows) and Legoland Parks (LEGO themed based accommodation,shows and rides). It is a profit-oriented public company that operates so as to have maximumreturn. Revenue and costs are the two important elements that decide profitability of theorganization. Thus, assessing relationship between both the factors is important for theorganizations. In current period, challenging tourism sector, market competition, rising costpressure, inflation and others are several key factors that greatly affect its return. Cost-Volume–Profit (CVP) is the best way to find out that how changes in the volumeand costs will affect the return of the organization. The technique is primarily concerned withexamining the impact of total sales volume and costs over the operational profitability (Weiss,2010). Fixed costs include expenses which does not change i.e. depreciation, insurance, rent etcwhilst variable cost encompasses expenditures which directly changes with the production level.Thus, with its use, MEP’s managerial team can easily determine that how their company’soperating return will be changed as a result of change of different selling price, changing demandand both the variable and fixed cost. The method also facilitates them to identify the most1 | P a g e
beneficial composition of sales of two or more items in their product portfolio that will givemaximum yield. The mechanism is based on certain key assumptions, provided below: Costs are of only two types, variable or fixed.Per unit selling price, variable costs and total fixed cost (TFC) does not changes.Company is able to sell all the units whatever they produce. Formula: PX=VX+TFC+profitabilityHere,X:NumberofunitsP:sellingpriceperunitV:Variablecost/unitImportanceofcost−volumeprofitmechanismContribution margin: Contribution is the excess or surplus of total revenues over thetotal variable costs. In other words, by what amount, MEP’s generate sales above the TVC isknown as contribution (Choo and Tan, 2011). In order to fulfil the corporate goal of high return, itis necessary for the enterprise to ensure that contribution exceeds its TFC. With this, businesscan also find out contribution each unit by allocating total contribution margin to the unitsproduced. Contribution=Sales–TVCUnitcontribution:Totalcontributionmargin/Numberofunits¿Contributionperunit=Sellingpriceperunit–variablecostperunitManagers must made decisions targeting maximum contribution so that operating profitcan be maximized. Profit-volume ratio: It is also called contribution-to-margin ratio which can be calculatedby dividing contribution to the total sales received by the MEP. It is one of the important andhighly useful ratios for determining profitability (Choo and Tan, 2011). If MEP increases itsselling price keeping into account constant variable cost, contribution goes up resultant higher2 | P a g e
PV ratio. Likewise, when MEP cut its marginal cost at fixed price, PVR also improves. By usingPV ratio, managers can make decisions whether they must continue producing a specific item orcease it. Profitvolumeratio:Contribution/Totalsales∗100PVR=Change∈contribution/Change∈salesCost−volumeratio=100–PVratioBreak-even ratio: In economics, break-even point is the point at where excess of revenuesover expenses is nil. In other words, firm neither suffers any loss nor any return (Weiss, 2010). Itis the point which indicates that firm efficiently used their all the resources. Break−evenpoint=Total¿cost/ContributionperunitBEPunits=TFC/Sellingprice−variablecostperunitBEP(sales)=BEPunits∗sellingpriceIt provides a level of sales which MEP must achieve to avoid any loss, however, salesvolume above BEP gives return to the establishment. Desired level: In actual practices, firm set target return and accordingly policies anddecisions are being made to reach set profit goals. CVP analysis assist MEP mangers inidentifying the sales level at which they can achieve target return at given variable and fixed costusing following formula:Desiredsalesvolume=TFC+desiredprofit/ProfitvolumeratioNet profitability: CVP analysis determines net profit as an excess of total sales revenuesover total costs incurred. In other words, amount by which contribution exceeds TFC is callednet profit which facilitates managers in identifying that whether entity had run their day to dayfunctions profitably or not.Netprofit=Totalrevenues–totalcostNetprofit=Totalrevenue–(total¿cost+totalvariablecost)Netprofit=Totalcontribution–Total¿cost3 | P a g e
Margin of safety: TRG can also find out margin of safety by determining the surplus oftotal actual sales volume over the BEP units. Increasing safety margin level benefited the entitywith positive return. Marginofsafety=actualsales–breakevensales1.2 Analyze pricing methods in travel and tourism sectorCost-plus pricing: This is the very basic but most popular method of pricing in which, totalcost is found and added with a needed profit margin to fix prices offered to the consumers(Bebbington and Thomson, 2013). The best use of this method is that it definitely gives returnand recoup all the costs made by the MEP. Being total cost as a key factor, the method is alsopopular as cost-centric method. Cost−pluspricing=TotalCost+profitmark−up100+(100∗25%)¿125Competition-based pricing: In today’s period, survival in the market is really tough andthere are number of rivalry firms operate in the market which actions, prices and offerings cannotbe avoided (Kaplan and Atkinson, 2015). This techniques initially judges what prices arecharged by the competitors and then rivalry’s product and services are being matched withMEP’s own offerings. In order to charge premium prices and ensure its acceptability, MEP mustintroduce innovation for differentiating their own product which will deliver comparativelygreater value to the final users.Demand based pricing: This method is often used by the organizations in price decisions.According to this, if there are large demand in the market, then MEP can easily set higher pricesbecause user will be ready to pay it to enjoy the best accommodation and other facilities whileservices with lower demand is charged with less prices (Huh and Park, 2013). This is based on lawof demand wherein as price increases, demand comes down and conversely which reach toequilibrium. Target return: As name implies, price is fixed after considering desirable return oninvestment. It delivers desired return to the MEP as an excess of revenue over total cost. Going rate: In this technique, many companies set prices considering prices charged by4 | P a g e
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