Cost-Volume-Profit Analysis and Corporate Finance

The provided document covers various aspects of corporate finance, including cost-volume-profit (CVP) analysis. CVP analysis is a tool used by businesses to determine the relationship between costs, volume, and profit. It helps in decision-making, funding decisions, and understanding the risk of strategy. The document also explores the role of CVP analysis in evaluating efficiency, finance performance, value of firm, and good corporate governance. Furthermore, it touches upon the application of CVP analysis in the mining company coal sub-sector going public in Indonesia's stock exchange. Additionally, it references relevant studies on green start-up finance, market mechanisms, funding dynamics, third-party funding in investment arbitration, and conservation finance.

FINANCE AND FUNDING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1.1 concept of CVP analysis and its importance for financial management of EUROCARIB 1
P1.2 Pricing methods that EUROCARIB can use to determine its price....................................1
P1.3 Factors affecting the profitability of Eurocarib ................................................................1
TASK 2............................................................................................................................................4
P2.1 Different types of management accounting information that Eurocarib can use...............4
P2.2 Application of investment appraisal techniques for decision making tools.......................5
TASK 3............................................................................................................................................8
P3.1 interpretation of appropriate ratios for profitability, liquidity and investment...................8
TASK 4..........................................................................................................................................11
P4.1 Analysing sources and distribution of funding organization for development of hotel.. .11
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15
APPENDIX....................................................................................................................................17

INTRODUCTION
Funding is considered as actual money given through organization or through
government sector with specific objective and in similar aspect, finance is referred as process for
receiving capital or money with perspective of business and mostly it is provided via financial
institutions like banks along with other lending agencies. The present report will discuss about
financial performance and position of EUROCARIB along with concept of cost volume and
profit analysis with its importance with context of financial management. In the similar aspect, it
will be showing analysis of multiple pricing method for identifying expense of each tourist along
with factors which are influencing margin. There will be description about types of management
accounting information and application of range of techniques for improving performance and
activities. There is assessment of investment appraisal techniques as tool for decision making and
interpretation about financial ratio of EUROCARIB in appropriate manner. Henceforth, it will be
analysing bothy internal and external source along with distribution of funding for purpose of
development.
TASK 1
P1.1 concept of CVP analysis and its importance for financial management of EUROCARIB
Cost- volume profit is the method of cost accounting by which company will carry out
the impact which is varying level of cost and volumes of organisation to measure operating profit
of the organisation. This method generally used to determine the break- even point which is used
to calculate sales volumes and for cost structures which is useful for managers in developing
short term economic decisions for organisation. In this method of cost analysis, sales price, fixed
cost and variable per unit will remain constant where cost- volumes develops several assumption
so that relevant analysis is measured in organisation (Polzin, Toxopeus and Stam, 2018).
Assumption in this analysis is that all units which is produced in organisation will assume
to be sold and cost remain variable or fixed. Second assumption of CVP analysis is that charges
in expenses occurs because of change in an activity level of organisation.
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Its importance for financial management of EUROCARIB is that it is used to measure
changes to be developed in organisation regarding cost and volumes which affects overall
operating expenses and net income of the company (Boesel, Kool and Lugo, 2018). For the
business of tour and travel industry, CVP helps in comparing the cost of operating and producing
goods, amount of goods sold and profit which is generated by sales of those goods. There are
three elements which used to measure CVP in EUROCARIB business that is cost, volume and
profit. By measuring cost, company will able to measures expenses which is involved in
producing or selling products or services of organisation. Volume helps in determine unit
produced in organisation and amount of services sold to customers. Profit determines difference
between selling prices of services minus cost to provide that services (Clauss and Remhof,
2018).
Therefore, CVP helps EUROCARIB company to determine its contribution margin,
which incur after deducting all the variable expenses and remaining sales revenue will be
consider as contribution margin of company. Therefore, it is the most important process of the
EUROCARIB organisation which helps to determine overall profits and sales volume of the
company.
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Illustration 1: cost -volume profit analysis
(source: Cost-Volume Profit (CVP) analysis, 2018)

P1.2 Pricing methods that EUROCARIB can use to determine its price
There are various pricing methods that can be used by Eurocarib to determine its price to
charge from its tourists. These pricing methods are as follows : Market penetration pricing : Thos pricing strategy is used in which the price of the
product and services is kept lower to increase its sales and attract more customers
towards the organisation product and services (Santosuosso and Scarlett, 2018).
Eurocarib can use this pricing strategy in which it can keep the price of its products and
services and after increasing its customer base can higher the price of product to increase
its profitability. Cost – based pricing : This pricing strategy is used by organisation in which the price of
the product is determined on the basis of cost of its products and services. In this pricing
strategy organisation determine the price of its products and services by adding the profit
margin to the cost of products and services to determine the final price of its product.
Eurocarib can use this pricing strategy in which the price of its product and services is
determined by adding the profit margin to the cost incurred for providing that product and
service to customers.
 Competition based pricing :It is a pricing strategy used by organisation to determine the
price of its product and services on the basis of competitors price offered for the same
product and services (Kay, 2018). Organisation use this pricing strategy to attract more
customers towards their brand by providing the same product and services of competitors
at less price. Eurocarib can use this pricing strategy by determining the price of its
product and services on the basis of price offered by competitors to attract more tourist
towards the organisation.
P1.3 Factors affecting the profitability of Eurocarib
There are various factors that affect the profitability of the organisation which consist of
the following: Seasonal variations : This factor affect the profitability of the Eurocarib due to the
changing season the demand for tourism increases or decreases. Tourism is mostly
popular in winter due to the increased demand in that season which generate more profit
for the tourism industry but on the contrary, In summer season the demand for travel and
tourism decreases which affect the profitability of the eurocarib.

 Political factors :These are those factors which affect the profitability of organisation due
to changes inn the government, changes in tax policy etc (Bergset, 2018). The
profitability of eurocarib is affected by these factors for example if there is increase in tax
rate than the organisation will have to high pay taxes due to which it profitability will be
reduced. Economic factors : These are those factors which affect the profitability of the firm by
various changes in the economic conditions. Economic factors includes inflation,
economic instability etc. Eurocarib is affected by these factors for example, high inflation
rate will result into high prices of travel packages due ton which many people will not be
able to afford the travel packages and thus there is low profitability for the eurocarib.
 Current trend : This factor affect the profitability of the organisation due to the changing
trend in industry. Current trend refers to the change in the taste and preference of the
customers in choosing the place for the destination (4 Types of Pricing Methods, 2016).
Nowadays there are various changes in the trend of tourism which includes different
types of tourism preferred by different age group. For example, adventure tourism is
mostly preferred by young generation people whereas religious tourism and culture
tourism is mostly preferred by old generation people. Eurocarib in order to reduce the
impact of this factor must provide tourism relating to all types to attract customers of all
age group.
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D1: viability of holiday trip
Particulars Figures (in £)
Selling price per tourist 1600
Variable cost per tourist 400
Contribution (per tourist) 1200
Fixed cost 120000
Break even point (in
numbers)
Fixed cost / contribution per
tourist
100
Break even point (in value) BEP (in numbers) * SP per
tourist
100 * 1600 = 160000
Desired profit = £30000 Fixed cost + desired profit /
contribution per tourist
120000 + 30000 / 1200 = 125
From the above computation it can be interpreted that break even point for eurocarib is 100
which is determined by dividing the fixed cost with the contribution. Also, Eurocarib in order to
earn the profit margin of £30000 must have 125 tourist on a holiday trip which will provide the
firm with their desired profit. To determine the number of tourist required to earn the desired
profit fixed cost is added to the desired profit margin and after that the amount derived is divided
by the contribution per tourist.
TASK 2
P2.1 Different types of management accounting information that Eurocarib can use
There are various types of management accounting information that can be used by
eurocarib to determine its performance and profitability. This information consist of following : Variance analysis : it refers to comparison of the budgeted expense with the actual
expenses to determine the variation in the expenses to take necessary action to match the
actual expenses with the budgeted (What Is Management Accounting Information, 2017 ).
It includes man – hours, machine hours, raw material consumption etc. these factors can
affect the budgeted figures and thus the profitability of the eurocarib can also be affected.
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 Budgeting : this refers to formulating budgets to determine the future profitability of the
firm. Budgeting assist in comparing the actual expense and income with the budgeted
expense and income to determine the future profitability of the firm (Hornuf and
Schwienbacher, 2018). Eurocarib can use Budgeting to determine its performance and
profitability on the basis of budgeted figures.
 Financial statements : This type of management accounting information helps the
organisation in determining its performance and position of the firm. Financial
statements includes income statements, balance sheet and cash flow statement. Income
statement is prepared by company to identify its performance by determining the net
profit on the basis of incomes and expenses (Clark, Reed and Sunderland, 2018).
Balance sheet show the position of organisation at the particular point of time and
includes assets and liabilities to determine the result. Cash flow statement is prepared in
order to identify the minimum cash requirement of the organisation to perform its various
functions. Eurocarib can use financial statements for determining its performance and
profitability.
P2.2 Application of investment appraisal techniques for decision making tools
Investment appraisal techniques is collection of techniques which is used for determining
attractiveness of particular investment. The main objective of investment appraisal is for
assessing project's viability, portfolio and programme decisions along with generating value.
With reference to business, its main objective is for placing value with its benefits with
appropriate justification of cost (Matiin, Ratnawati and Riyadi, 2018). For example,
EUROCARIB has option of undertaking initial investment of 130000 with 20% cost of capital as
with life of 5 years but different cash flow is stated below:
Net Present value (Project A)
Year Cash inflows PV factor @ 20%
Discounted cash
inflows
1 58575 0.833 48812.5
2 71355 0.694 49552
3 62835 0.579 36363
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4 76680 0.482 36979
5 89460 0.402 35952
Dum of discounted cash
inflow 207659
Prior investment 130000
NPV
(Total discounted
cash inflows - initial
investment) 77659
Net Present value (Project B)
Year Cash inflows PV factor @ 20%
Discounted cash
inflows
1 59125 0.833 49270.83
2 72025 0.694 50017
3 63425 0.579 36704
4 77400 0.482 37326
5 90300 0.402 36290
Dum of discounted cash
inflow 209608
Prior investment 130000
NPV
(Total discounted
cash inflows - initial
investment) 79608
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Interpretation: It is difference among present value of cash inflows and cash outflow of
specific duration. It could be clearly viewed that both Project A and B are resulting positive
outcome at similar cost of capital at 20%. The net present value of project A is 77659 and Project
B is 79608 which is higher comparatively. Thus, as per net present value Project B is preferable.
Internal Rte of Return (Project A)
Year Cash inflows
0 -130000
1 58575
2 71355
3 62835
4 76680
5 89460
Internal rate of return (IRR) 43%
Internal Rte of Return (Project B)
Year Cash inflows
0 -130000
1 59125
2 72025
3 63425
4 77400
5 90300
Internal rate of return (IRR) 44%
Interpretation: It is metric which is applicable in this capital budgeting with estimate of
profitability for particular investment. The above table is articulating internal rate of return on
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20% cost of capital of both project A and B where the highest return is extracted in Project B. It
is highly preferable as compared to project A with 445.
Payback period (Project A)
Year Cash inflows Cumulative cash inflows
1 58575 58575
2 71355 129930
3 62835 192765
4 76680 269445
5 89460 358905
Initial investment 130000
Payback period 2
0.0011
Payback period 2.001 years
Payback period (Project B)
Year Cash inflows Cumulative cash inflows
1 59125 59125
2 72025 131150
3 63425 194575
4 77400 271975
5 90300 362275
Initial investment 130000
Payback period 1
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0.9840
Payback period 1.98 years
Interpretation: It is considered as length of time with need for recovering its initial
investment of 130000 with 20% cost of capital. On basis of project A, initial cost is covered in
approx 2 years whereas Project B has 1.98 which is smaller comparatively. According to
payback period, Project B is recommendable for best outcome.
Thus, as per each investment appraisal technique, Project B is in favour of huge returns
so EUROCARIB will be undertaking Project B for initial investment of 130000 with 20% cost of
capital and for life of 5 years.
TASK 3
P3.1 interpretation of appropriate ratios for profitability, liquidity and investment
Ratio analysis of Thomas Cook for the year 2016-17 which is enumerated below
According to above calculation of profitability ratio, it is interpreted that from
comparison of previous year, company may reduce their selling price of its products by 10.4%
without incurring any loss. But from the above calculation GP ratio of company gets decreases
which means company is not developing improvement in organisation. By comparing net profit
with previous year, it indicates that there is no efficient management regarding business affairs
of the company. Return on capital employed of the company from previous year has increases
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which means that company has invested back their profits in organisation to provide benefits to
its shareholder's.
From the above calculation it is interpreted that, company's current ratios gets decreases
in comparison to previous year which means that there are higher chances of risk and distress in
company. Company's current assets were .52 times the value of current liabilities which is less
than .57 times at end of 2017. Quick ratio of company also measure that company does not have
enough quick assets to pay for its liabilities.
Above calculation interpreted that in year 2018 company's overall debt has increases with
3.73 times which means that there are higher degree of debt financing in organisation and
company might not be able to pay its interest payments. To develop its position company have to
maintain its debt ratio which is with 0.5 :1.
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Above calculation interpreted that from the year 2017, company's stock turnover
increases 189.9 times which indicates that inventories are fast moving in organisation. Total
assets turnover ratio gets slightly increases which is 1.3 times and it indicates that company using
its assets more efficiently in organisation. Above calculation also interpret ate that overall fixed
assets of company decreases which means that company needs to issue new products to revive its
sales and company has over invested in its fixed assets.
According to above calculation, earning per share of the company has sightly increases
which from .01. It indicated that company is now capable of generating significant dividend for
its investors. But company also have to develop affords to improve its earning per share by
growing its revenues, profits will have to calculate through lowering its costs as percentage of
revenue.
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TASK 4
P4.1 Analysing sources and distribution of funding organization for development of hotel.
Sources of finance with perspective of business are referred as debt, equity, term loans,
letter of credit etc. There funding sources are used in multiple situations and classified in two
categories such as internal and external sources of finance are stated below with appropriate
description such as:
Internal Sources of finance: It recommends nature of capital and finance as it is
generated internally through business not similar to finance like loan which is arranged through
financial institutions and banks.
Retained earnings/ Profits: With context to business, it is very significant sources of
finance for established and profitable business. It is long termed source of finance for business
perspective as it has no compulsory maturity on such as loans and debenture.
Sale of fixed asset: is it another important aspect for the company generally when they
sales assets and cash which is generated from selling of assets is used for financing capital needs.
This is used for both short term or long term financing (Geddes, Schmidtand Steffen, 2018).
Reduction in working capital: company generally use two types of finance which is
long termed finance and working capital finance. Long term finance used by company for its
capital expenditure and working capital finance used to regulate day to day needs of
organisation.
External sources of financing: these sources of financing used to suggest nature of
finance in organisation. External sources of financing are equity capital, preferred stock,
debenture, term loans, venture capital, and many more.
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Debt- financing: it is used to do fixed payment which is made to lenders, is known as
debt financing. It includes bank loans, corporate bonds, leasing, trade credit, debentures etc.
Equity financing: this is known to be major sources of doing financing which indicate
that interest of shareholders and share of ownership in firm.
Therefore, to develop new hotel in organisation, both internal and external factors have to
be analysed by the company so that effective business operation will get developed. To develop
new hotel distribution strategies helps organisation to determine channel by which hotel rooms
are to sold and cost of acquisition for the individual channel in an organisation.
CONCLUSION
From the above study it had been concluded that finance and funding are very important
to business entity whether it is of any industry. It has shown that cost, volume and margin plays
vital role in EUROCARIB. It has been articulated that each method of pricing helps in
identifying charge, where market penetration pricing is highly beneficial to business entity. In
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the similar aspect, seasonal variations and trends are important factor which influence the margin
of organization. The decision making procedures are improved with adoption of different
management accounting decision with application of investment appraisal techniques such as
internal rate of return, payback period and net present value as project B is giving the best
outcome as compared to project A so it is recommendable to EUROCARIB. Henceforth, it is
summarised with both source of finance as internal and external as both are mandatory for
business.
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REFERENCES
Books and Journals
Matiin, N., Ratnawati, T. and Riyadi, S., 2018. The Influence of Investment Decisions, Funding
Decisions, Risk of Strategy, To Efficeincy, Finance Performance, Value of Firm, Good
Corporate Governance As Moderating Variable In The Mining Company Coal Sub Sector
Go Public In Indonesia Stock Exchange. Archives of Business Research. 6(6).
Clark, R., Reed, J. and Sunderland, T., 2018. Bridging funding gaps for climate and sustainable
development: Pitfalls, progress and potential of private finance. Land Use Policy. 71.
pp.335-346.
Bergset, L., 2018. Green start-up finance–where do particular challenges lie?. International
Journal of Entrepreneurial Behavior & Research. 24(2). pp.451-575.
Hornuf, L. and Schwienbacher, A., 2018. Market mechanisms and funding dynamics in equity
crowdfunding. Journal of Corporate Finance. 50. pp.556-574.
Santosuosso, T. and Scarlett, R., 2018. Third-Party Funding in Investment Arbitration:
Misappropriation of Access to Justice Rhetoric by Global Speculative Finance. Boston
College Law School Law and Justice in the Americas Working Paper No. 8.
Kay, K., 2018. A hostile takeover of nature? Placing value in conservation
finance. Antipode. 50(1). pp.164-183.
Boesel, N., Kool, C. and Lugo, S., 2018. Do European banks with a covered bond program issue
asset-backed securities for funding?. Journal of International Money and Finance. 81.
pp.76-87.
Polzin, F., Toxopeus, H. and Stam, E., 2018. The wisdom of the crowd in funding: information
heterogeneity and social networks of crowdfunders. Small Business Economics. 50(2).
pp.251-273.
Clauss, M. and Remhof, S., 2018. A Euro Area Finance Ministry–Recipe for Improved
Governance?. In CESifo Forum (Vol. 19, No. 3, pp. 36-43). München: ifo Institut–Leibniz-
Institut für Wirtschaftsforschung an der Universität München.
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Geddes, A., Schmidt, T. S. and Steffen, B., 2018. The multiple roles of state investment banks in
low-carbon energy finance: An analysis of Australia, the UK and Germany. Energy
Policy. 115. pp.158-170.
ONLINE
Cost-Volume Profit (CVP) Analysis. 2018. [ONLINE]. Available through
<http://knowledgegrab.com/learners-zone/study-support/cost-and-management-
accounting-explained/decision-making/cost-volume-profit-cvp-analysis/>
What Is Management Accounting Information. 2017. [Online]. Available through :
<https://bizfluent.com>
4 Types of Pricing Methods. 2016. [Online]. Available through
:<http://www.economicsdiscussion.net/>
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APPENDIX
Income statement
Balance sheet
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Cash flow
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