Management Accounting and Investment Appraisal Techniques

The assignment discusses factors that influence profits and different types of management accounting information utilized in the travel and tourism sector. It also examines the use of investment appraisal techniques by tour operators, including interpret ratios for profitability, liquidity, and investment. The report concludes with an analysis of internal and external sources and distribution of funding and financing for developing a new hotel in the Caribbean.

Finance in funding in travel
and tourism sector

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1 ...........................................................................................................................................1
1.1 Concept of CVP analysis and its importance in financial management ..........................1
1.2 Analysis of pricing methods.............................................................................................3
1.3 Factors influence on profits .............................................................................................4
D 1 Viability of holiday trip ..................................................................................................5
TASK 2............................................................................................................................................5
2.1 Different types of management accounting information..................................................5
2.2 Use of investment appraisal techniques ..........................................................................6
TASK 3 ...........................................................................................................................................9
3.1 Interpret ratios for profitability, liquidity and investment ...............................................9
TASK 4..........................................................................................................................................12
4.1 Sources and distribution of funding ..............................................................................12
CONCLUSION .............................................................................................................................14
REFERENCES .............................................................................................................................15
APPENDIX ...................................................................................................................................16

INTRODUCTION
Finance is area that is involved with the investment of assets and liabilities over space
and time frequently under situation of risk and doubt. On the other hand, funding is the action of
giving financial resources normally in kind of money or other values such as exertion or time to
finance needs by firm (Beck and Yang, 2015). In this context, finance and funding is essential
part of travel and tourism sector for planning trips and earning profits. This study is based on
EUROCARIB TOUR. It is major London based European tour operators. This tour operator is
planning summer holiday trip to Caribbean holiday Resort. This report will examine concept of
CVP analysis and its importance in financial management. It will analysis of pricing method and
different factors influence profits earn on holiday trips. Furthermore, report will explain different
types of management accounting information and use of investment appraisal techniques as
decision making tools.
TASK 1
1.1 Concept of CVP analysis and its importance in financial management
Cost Volume Profits Analysis(CVP):
Cost volume profits analysis is planning procedures that administration utilizes to
anticipate future volume of action, costs obtained and received profits. The CVP analysis
categorizes all costs as either fixed and variable. Fixed costs are expenditures that do not displace
with producing the volume of units. On the other side, variable costs alteration with manufacture
level (Odden and Picus, 2018). This analysis utilizes two costs to strategy out level of production
and associated with level of income. As production levels enhance, smaller percentage of total
income is fixed costs while remain constant percentage that is variable costs. Cost controller and
administration if organization investigate these trends in an attempt to anticipate future costs,
sales and profits of company.
The CVP analysis are also adopted by travel and tourism sector such as EUROCARIB.
There are various elements in this analysis that are level of volume of actions, selling prices of
unit, variable cost per unit, total fixed cost and direct as well as indirect cost of workforce in
organization. There is formula for CVP analysis that is derived from profits equation such as:
px= vx+FC+Profit
Where,
p is price per unit
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v is variable cost per unit
x are total numbers of unit produced and sold
FC is total fixed cost
For calculating price using CVP, addition of profits, fixed cost and variable cost of total
number of produce and sold units. With the help of it, EUROCARIB identify price for sales
volume and costs of products. With the help of it, determine cost at different level of activity by
fixed budget (Bergset, 2018). CVP analysis aids in assessment and control of execution for
profits of company. Firm utilize this for calculating break even point in sales and procedures of
production. This analysis covers all costs associated with revenue of organization.
Importance of Cost Volume Profits Analysis (CVP):
The cost volume profits analysis is very essential to determine interrelation of factors that
affected on profits of EUROCARIB. The interrelationship between cost volume and profits
create structure of profits of the organization.
 It is important to identify the fixed and variable cost of total number of produced and sold
unit of products.
 With the help of it, chosen tour operator can determine costs and sales for planning the
different trips.
 CVP analysis is important to identify and control all the fixed and variable cost of
products and services of the company (Rajé, 2017).
 It is essential to predict and analyse the significance of its short run decisions about fixed
costs, marginal costs, volume of sales and selling price for plans of profits in which CVP
plays an important role.
Particulars Figures (in £)
Fixed cost 120000
Desired profit margin 30000
Selling price per unit 1600
Variable cost per unit 400
Contribution 1200
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Number of tourists need to be served for
getting desired profit margin
(120000 + 30000) / 1200
= 125
Break even calculation: fixed cost/ (selling cost-variablecost)
= 120000/(1600-400)
BEP =100
1.2 Analysis of pricing methods
The concept of pricing has become more flexible to the product of this company. Every
organization adopts different pricing methods for increasing sales and profits of business. In
order to that, travel and tourism operators are following various pricing strategies that are
different form other business. So that, operators of company make sure that appropriate decision
making for pricing of the products and services. There are various pricing methods, such as:
Mark up pricing methods: In this method, tour operators make sure that setting up price
of holiday tours and activities to make profits of each sale. Developing time spent and promoting
holiday associated with costs of business (Garvey, Book and Covert, 2016). There are two types
of costs which are fixed and variable costs. Rent, maintenance of building and insurance involve
in fixed cost. Pay-off, force, repairs, travel cost and publicity costs cover in variable cost.
Seasonal pricing: In most cases, tour operators are deciding pricing according to season.
It is standard mode for travel sector to cater for various levels of need due to the time of year.
These are applying for school holiday, public holiday and for localized events each year.
Discounting pricing: Travel operators are frequently following this pricing method in off
season to help output management (Noreen Brewer and Garrison, 2014). But it becomes fast way
to decrease profitability. EUROCARIB utilized discounted prices, thus making charge normal
rate and devalue product. They are adding the premises in discounted price such as number of
tourists or minimum stay in booking.
Mark Down pricing: Tour operators needs to mark down their pricing in relation to rest
competitive. It is abstract during slower month. In this method, company keep business aimless.
They generate booking without any promotional discount but still gain income.
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Common pricing types: There are some common pricing such as per unit, per person,
single or double occupancy.
There are other pricing method also :
 penetration pricing: it is used when company wants to attract new customers to a new
Product or services. Eurocarib will offer the packages at low price initially and will
increase the rates when company achieve market growth.
 Price differentiation: in this strategy company will provide same product at different
prices in order to analyse the respond of the customer regarding the price. On the basis of
the customer preferences price will be fixed.
 Price skimming: in this strategy the company will launch the package at higher rate
initially and will lower the price after a specific time.
Therefore, EUROCARIB make sure that identify and utilizes appropriate pricing
methods for increasing sales and gain profits of business. These pricing strategies helps in
planning of holiday trip and customer satisfaction. With help of it, company identify costs and
assume sales. It can be said from the strategies that Eurocarib have to adopt penetration pricing
strategy in order to attract more customer for its new packages, the company can increase the
price once the services will get promoted in market and helps in attracting customers.
1.3 Factors influence on profits
The objective of every business is making profits through increasing sales. In this
context, EUROCARIB is planning holiday trip in summers for making profits. But there are
some factors affects on profits of tour operators that will earn on holiday trip. Such as:
Location: Tour operator decide location of holiday trip. If location is not so popular,
than customer will not prefer to experience it. This factors affects on profits of company.
Therefore, tour operator make sure that planning of holiday trip should has popular location
(Vardakas, Zorba and Verikoukis, 2015).
Security and safety: For deciding location, EUROCARIB make sure that proper attention
on safety and security for customers. If there is problem regarding safety and security at location.
So that, customers are not coming in that place (McCormick, 2018). This type of factors are
affects on profits of business.
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Seasonal changes: Changes in seasons are common factors that affects on profit margin
of EUROCARIB. Therefore, tour operators make sure that planning of holiday trip according to
season. If the firm decide holiday trip in summer on Caribbean holiday resort, so that there are
many tourists are coming on that. This helps in increasing profits margin of business.
Political aspects: As a result of higher security social control, bear in mind travel
restriction and enhanced sensibility as focused by political separation. If there is warning to
destination and marketing efforts require shifting to consumer awareness campaign for helps and
comforting tourists(Collier, 2015).
Price: EUROCARIB make sure that decide appropriate pricing of services for planning
of holiday trip. Pricing of products and services affects on profits of business. If the tour operator
decide high pricing of packages, so that there are some consumers will come on trip. This factors
affects on profits of business that will earn on trip.
Customer demand: Profits of business also affects by customer demand for product and
services that they want. Therefore, tour operators make sure that planning of holiday trip
according to customer demand. If the consumer feel happy and relaxing to location. So that,
there are many consumers will come on holiday trip that increasing profits of business.
In addition to that, there are many other factors such as special events, sporting events
and film festivals that are affected on profits of tour business(Beck, Lu and Yang, 2015).
Changes in destination, increasing sales affects on profitability business. So that, tour operators
make sure that deciding appropriate pricing for planning of holiday trip for increasing profits of
business. In this context, company needs to follow different methods of pricing for making
profits.
D 1 Viability of holiday trip
EUROCARIB decide fixed cost £1,20,000 and £400 is variable cost. Therefore, desired
profits margin is £30000 and selling price per unit is £1600 and contribution is £1200. So that,
number of tourists needs to be served for getting desired profits margin that is £125.
TASK 2
2.1 Different types of management accounting information
Management Accounting information:
Management accounting is that division of accounting that allows managers to make
short term and long term determination. It is procedure of preparing management reports to give
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financial data at the right time to correct judgement. Therefore, it is concerned with determining,
evaluating and presenting data of financial to assist objective.
Types of management accounting information:
Management accounting information helps in decision making, measuring the execution,
planning in the business (Odden and Picus, 2018). Information includes reports of management
accounting such as budget report, sales report, cost report etc. that are useful for company.
Budget report: It is the fundamental reports which helps in showing the actual
performance of the company as per the estimation that are based on the past performance of the
company. This report will help in showing the variances between the budgeted and actual
performance. With the help of it, tour operators determine the response for the variances and can
take several measures in order to improve the business operations. (Types of Management
Accounting Reports, 2018). Estimate budget will be based on early experience. While staying
within budgeted amount, EUROCARIB accomplish its objectives and mission that is planning of
holiday trip.
Financial statement: it is one of the most essential reports which help the management of
Eurocarib to analyse the financial performance of the company over a specific time period. The
different statements such as cash flow will help to identify the the company is using its resources
in order to generate revenue (Bergset, 2018). Income statement will assist the management in
making decisions regarding the revenue and expenses. It will help in making strategies in order
to control the expenses and increase the revenue.
Therefore, all these reports are very useful for determining cost, estimated budget,
performance review, sales in the firm. With the help of it, tour operator assess all the information
than planning of holiday trip for Caribbean holiday resort (Rajé, 2017). Firm utilize these
informations for making accurate judgement, control various areas, enhance policies, usage of
resources by allocating costs as well as assess execution for increasing profits in the business.
2.2 Use of investment appraisal techniques
Investment appraisal techniques:
It is collection of techniques for increasing of quality of investment. The aim of
investment appraisal is to measure practicality of project and portfolio determination and
generating value. In order to that, the basic goal of investment appraisal is to spot value for
justified costs by company. There are seven techniques of investment appraisal such as:
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Payback Period Technique: This technique takes cash inflow from capital investment
project to balance the cash outflows. It acknowledges the improvement of actual capital invested
in project(Garvey, Book and Covert, 2016). Cash inflows from project is balanced to cash
outflow in projects. The dimension of time this procedure takes provides pay-back period
project.
It can be said from the above calculation, that project B is more appropriable as it would
take less time in getting back its initial investment that is 3.9 years from Project a which is taking
4.1 tears.
Accounting Rate of Return of Technique(ARR): This method is also called as return on
investment or return of capital employed technique. This technique to assess enhance in expected
profits to result from an investment by transporting net accounting profits increasing from
investment as percent of capital investment. For calculating ARR, company adopt particular
formula that is
ARR= Average annual profits(AAP) / Average capital investment * 100
Where
AAP= Annual cash flows generated from investment-depreciation/ number of years of
investment
and
ACI= ½ (investment+residual value)
Net Present Value Technique(NPV): The purpose of company is to make wealth through
utilizing existing and upcoming to make products and services. It is must overstep present value
of all expected cash outflows to make wealth(Noreen, Brewer and Garrison, 2014). NPV is
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acquired by discounting all cash outflows and inflows ascribable to capital investment project by
select percentage that is weighted average cost of capital of organization. The exercise included
in calculating present value is called as discount factors that multiplied cash flows. Following
expression give discount factor that is
PV=1/(1 + r)n
Where
r= rate of interest per annum
n= number of years that are discounting
Year
Project A
(cash
flows)
PV factor
@ 10%
Discounte
d cash
inflow
Project B
(cash
flows)
Discounte
d cash
inflow
1 50000 0.909 45455 52000 47273
2 58000 0.826 47934 64000 52893
3 53000 0.751 39820 59000 44328
4 69000 0.683 47128 73000 49860
5 81000 0.621 50295 88000 54641
Total
discounted
cash inflow 230631 248994
Less: initial
investment 170000 170000
NPV 60631 78994
It can be said from the above calculation that NPV of project B is much higher as
compared to Project A that is 78994. hence, project B will be more beneficial for the company to
opt for.
Internal Rate of Return Technique(IRR): It is percentage discount rate utilized in capital
investment appraisals that takes cost of project and its upcoming cash inflow into equality. It is
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rate of return that compares present value of expected net cash flows with initial outlay. The test
of profits of project is the relationship between IRR and minimum acceptable rate of return. In
the form of ratio IRR stated
Cash Inflow/ Cash Outflow= 1
P.V. Of Cash Inflow – P. V. of Cash Outflow=0
In case of payback calculation, factors reflects similar relation of investment and cash
inflow that is
F= I/C
Where
F= factors to be located
I=Original Investment
C= Average cash inflow per year
Year
Project A
(cash
flows)
Project B
(cash
flows)
-170000 -170000
1 50000 52000
2 58000 64000
3 53000 59000
4 69000 73000
5 81000 88000
IRR 22% 25%
From the above calculation it can be interpreted that project B is more appreciable as it
has higher internal rate of return of 25% than project A which has 22% IRR.
It can be recommanded from the above calculation that project B is more profitable and
management should have to choose project B for capital investment purpose.
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TASK 3
3.1 Interpret ratios for profitability, liquidity and investment
Particulars Formula 2016 2017
Gross Profit Gross profits
/sales*100 42.7 40
Net Profit Net profit/sales*100 16.96 14.88
Current Ratio Current Assets/current
liability 0.24 0.18
Quick Ratio Quick Assets/current
Liability 0.13 0.08
Dividend Payout Dividend/Net income 40.3 40.8
Earning Per Share
Total
Earning/Outstanding
share
3.72 3.59
Profitability ratio: Gross profits and net profit are included in profitability ratio that
utilized by Carnival Corp tour operator. In 2016, the profitability ratio of company is 42.7% that
is decreased 40 in 2017. It is not beneficial for company. This ratio is presenting performance of
company.
10
08/07/1905
09/07/1905
0.38
0.4
0.42
0.44
Gross Profit
08/07/1905
09/07/1905
0.12
0.14
0.16
0.18
Net Profit ratio

In order to increase the profitability ratio of the company, the management has to take
decision regarding increasing the efficiency of the operational process. It has to take steps for
controlling the expenses of the company.
Liquidity ratio: Current and quick ratio involve in liquidity ratio that affects on credit
rating of Carnival Corp. The ideal ratio is generally is 2:1 depend upon business to business.
This current ratio of company is not good, because it is decreased in ratio of 2:1. This ratio is
presenting the financial stability of organization (Vardakas, Zorba and Verikoukis, 2015).
11
08/07/1905
09/07/1905
0
0.1
0.2
0.3
Current Ratio
08/07/1905
09/07/1905
0
0.05
0.1
0.15
Quick Ratio

It can be recommanded that in order to improve the liquidity ratio, the company has to
control its expenses and increase its sales in order to maximise the profitability of the company.
It can be recommanded that company has to respond to market fluctuation earlier in order
to surpass the situation. It will prevent sudden decrease in price of share of shareholders.
TASK 4
4.1 Sources and distribution of funding
Every company requires of fund and finance for expanding their business at international
level. In this context, EUROCARIB tour operator intend construct new hotel in Caribbean. For
12
08/07/1905
09/07/1905
4040.240.440.640.841
Dividend Pay-out
08/07/1905
09/07/1905
3.53.553.63.653.73.75
Earning Per Share

that, firm requires funds and financial resources for developing their new hotel. There are two
types of source such as internal and external.
Internal sources:
In internal sources, owner's capital, sale of stock, sale of asset, retained profits and
collection of debt.
Owner's capital: It is internal source of funding and finance that utilized for expanding
the every business. In this context, EUROCARIB tour operator utilizes their own capital for
developing this new hotel in Caribbean. With the help of it, company is investing their own
capital for new business in the existing place.
Retained profits: It is also internal source of funding or financing that used for expanding
the every business. In this context, EUROCARIB tour operator uses their previous profits in the
present year for developing the new hotel in Caribbean. With the help of it, firm is invested their
retained profits for developing new business.
Sale of assets: This internal source helps in funding and financing in expansion of every
business. In this context, EUROCARIB tour operator utilise by sale of assets for developing the
new hotel. Company acquire funds and finance by selling of assets for expanding the new
business (Vardakas, Zorba and Verikoukis, 2015).
Sale of stock: It is internal source of fund and finance that use by every business. In this
context, EUROCARIB tour operator use this source by selling of their company's stock for
growing their business. With the help of it, company selling their stock for developing the new
hotel in Caribbean.
Collection of debt: It is also includes in internal source of funding and financing use by
every business. In this context, EUROCARIB tour operator use this source by collecting the
debts from their debtors. With the help of it, firm get collection from their debtors for developing
the new hotel in Caribbean.
External Source:
Bank loan, additional partners, share issue, leasing, government grants and trade credit
are included in external source of funds and finance.
Bank Loan: It is external source of funds and finance that use by every company. It is
most simple and quick way to take loan from the bank in return to pay interest on instalment
basis In this context, EUROCARIB tour operator utilize source in terms of acquiring the loan
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form bank. They are returned to bank including interest with instalment for expanding their
business in terms of developing new hotel in Caribbean.
Additional partner: It is also external source of funding and financing that use by every
business. In this context, EUROCARIB tour operator utilise this source in terms of doing
partnership for expanding the new business. New partner contributes in developing new project.
With the help of it, tour operator expand their hotel in Caribbean.
Bank overdraft: It is also external source of funding and financing that use by every
business. In this context, EUROCARIB tour operator use their bank overdraft limit for
expanding their new hotel in Caribbean. With the help of it, company acquiring funds and
finance for expanding their business.
Share issue: It is also external source of funding and financing that use by every
business. In this context, EUROCARIB tour operator issue their company's share and acquiring
the funds and finance for expanding their business.
CONCLUSION
This report has summarised that cost volume profit analysis concept and its importance in
financial management. It can be concluded that pricing methods that utilised tour operators for
planning of holiday trip. It can be discussed that factors influence on profits and Different types
of management accounting information that are utilized in travel and tourism sector. It can be
concluded that Use of investment appraisal techniques utilised by tour operators. It can be
discussed that Interpret ratios for profitability, liquidity and investment utilized by Carnival Corp
travel. Furthermore, report has completed that internal and external sources and distribution of
funding and financing for developing new hotel in Caribbean by EUROCARIB tour operator.
Bank loan, additional partners, share issue, leasing, government grants and trade credit are
included in external source and owner's capital, sale of stock, sale of asset, retained profits and
collection of debt in internal source of funding.
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REFERENCES
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rural China. World Development. 67. pp.38-56.
Bergset, L., 2018. Green start-up finance–where do particular challenges lie?. International
Journal of Entrepreneurial Behavior & Research. 24(2). pp.451-575.
Collier, P. M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Garvey, P. R., Book, S. A. and Covert, R. P., 2016. Probability methods for cost uncertainty
analysis: A systems engineering perspective. Chapman and Hall/CRC.
Laudon, K. C. and Laudon, J. P., 2015. Management information systems (Vol. 8). Prentice Hall.
Noreen, E. W., Brewer, P. C. and Garrison, R. H., 2014. Managerial accounting for managers.
New York: McGraw-Hill/Irwin.
Odden, A. and Picus, L.O., 2018. AN EVIDENCE-BASED APPROACH TO SCHOOL
FINANCE ADEQUACY IN MICHIGAN: Determining the Cost for Funding Educational
Achievement for All Michigan Students.
Rajé, F., 2017. Transport, demand management and social inclusion: The need for ethnic
perspectives. Routledge.
Vardakas, J. S., Zorba, N. and Verikoukis, C. V., 2015. A survey on demand response programs
in smart grids: Pricing methods and optimization algorithms. IEEE Communications
Surveys & Tutorials. 17(1). pp.152-178.
Online
McCormick, M., 2018. Pricing strategies for Tour Operators. [ONLINE]. Available through. :
<https://blog.blackcurve.com/pricing-strategies-for-tour-operators-and-online-travel-agents>.
Norman, R., 2018. Investment appraisal techniques. [ONLINE]. Available through. :
<https://www.icas.com/education-and-qualifications/back-to-basics-investment-appraisal-
techniques-student-blog>.
Types of Management Accounting Reports, 2018. [ONLINE]. Available through. :
<https://www.completecontroller.com/types-of-managerial-accounting-reports/>.
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APPENDIX
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