Financial Analysis Report: Merlin Entertainments and TRG Performance

This report provides a comprehensive financial analysis of Merlin Entertainments Plc and The Restaurant Group (TRG) Plc. It begins with an introduction to the travel and tourism industry's contribution to the global economy and the importance of financial management in determining costs and pricing. The report delves into the significance of costs and volume in financial management, examining different cost types, allocation, and the volume concept, including break-even analysis and economies of scale, using Merlin Entertainments as a case study. It then explores various pricing methods employed in the travel and tourism sector, such as discounted pricing, cost-plus pricing, and return on capital employed, again using Merlin Entertainments. The report also covers different types of management accounting information, its use as a decision-making tool, and factors influencing profit for tourism businesses. Furthermore, it includes a case study of TRG Plc's financial accounts to aid decision-making and concludes with a discussion of funding sources and distribution for tourism development, both public and non-public.

Finance and Funding
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Importance of costs and volume in financial management of travel and tourism businesses
using Merlin Entertainments Plc..................................................................................................3
1.2 Pricing methods used in the travel and tourism sector using Merlin Entertainments............6
1.3 Factors influencing profit for travel and tourism businesses using Merlin Entertainments
Plc................................................................................................................................................9
Task 2.............................................................................................................................................10
2.1 Different types of management accounting information that could be used in travel and
tourism businesses using Merlin Entertainments Plc................................................................10
2.2 Use of management accounting information as a decision-making tool for Merlin
Entertainments Plc.....................................................................................................................11
Task 3.............................................................................................................................................12
3.1 Financial accounts of The Restaurant Group (TRG) Plc for the year ended 28 December
2014 showing at least two years performance...........................................................................12
TASK 4..........................................................................................................................................13
4.1 Sources and distribution of funding.....................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15
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INTRODUCTION
Travel and tourism industry has contributed a lot to the world's economy in terms of high
contribution in GDP. The application of financial management is seen to be crucial within the
business environment in determining cost and taking pricing decisions. This unit is focused
towards the case of Merlin Entertainments, a leading entertainment company of United
Kingdom. As per the given information, company operates around 110 attractions in 23 countries
across four continents (Merlin Entertainments, 2016). The present report explains about the
importance of costs and volume in financial management of travel and tourism businesses as
well as the pricing methods that are used in this sector. However, the next section of study
represents the different types of management accounting and the use of management accounting
information as a decision making tool in travel and tourism businesses. Factors that are
influencing the profit of tourism entrepreneurs specially to Merlin Entertainments Plc are also
explained. In addition, case study of The Restaurant Group plc, a leading restaurant company is
taken into consideration for interpreting financial accounts to assist decision making in travel and
tourism businesses. At last, final section represents the sources and distribution of funding for
public and non-public tourism development.
TASK 1
1.1 Importance of costs and volume in financial management of travel and tourism businesses
using Merlin Entertainments Plc
In respect with the given case scenario, Merlin Entertainments Plc is a leading
entertainment company which aims at becoming a worldwide leader in branded, location-based,
family entertainment from which it creates a strategy to attain high growth, high return and a
family entertainment company (Bhowmik and Saha, 2013).
Cost concept
Before explaining the concept of cost and volume, this is important to identify various
kinds of costs as it is helpful in financial management of the report. Various types of costs are
explained in below:
Direct cost: Cost that is significantly associated with the production is called as direct
cost. Direct cost of production process include material, labor as well as many other direct
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expenditures. Direct cost can be in the form of human resources and materials. These costs are
mandatory to be bear at the time of manufacturing process (Adams, 2006).
Indirect cost: The cost which is not directly linked to the production process but it
indirectly links with the manufacturing unit is significantly known as indirect costs. Several
range of indirect cost are administration, personnel as well as security costs. In other words,
factory cost bear by business is known as indirect cost.
Fixed cost: In respect with the manufacturing unit, fixed cost is one which remains same
at any level of production. In other words, cost which does not change with the production level
is called as fixed cost. The fixed cost is going to be incurred at the production of single unit.
Variable cost: Another form of cost is variable which changes as per the level of
production. This cost has a changing nature as per the production volume (Halabi and Carroll,
2015). Dependent cost is said to be the variable cost. For an example: organization produces 100
units so it bears less cost, on the other hand, at the production of 1000 unit it bears increased
cost . Such kind of cost is said to be variable cost and has a relevant aspect in manufacturing
industry. Examples of variable cost are advertising, insurance and office supplies.
Allocation and appropriation of costs:
Main aim behind the allocation of cost is to identify, aggregate and access cost incurred
during manufacturing as per the objectives of costs. However, to calculate actual cost per unit,
this is too important to divide the cost within all the departments. In order to allocate cost, it is
the foremost important to take pricing decisions. In respect with the mentioned company, major
task is of dividing cost into various activities as per the requirements so that process of pricing
decision can become easier. For a service industry like as Tourism, It becomes difficult to set
price as per the cost occurred from different activities. The mentioned company is facing lot of
issues including more competition at the time of offering services to the customers of UK in
which prices of offering has become a foremost issue for the company. Allocation of cost is the
major concept so as to decide the actual pricing of products by assessing cost per unit (Hu, Tian
and Zhu, 2016). Within service industry, appropriation of cost is the actual allocation of cost and
assessment of cost per unit. However, it is easier to understand costing concept so that decision
over reducing expenses can be taken. However, this is all the round, mandatory to use different
costing methods including absorption costing, marginal costing, activity based costing and so on.
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With the help of such methods, organization can allocate cost to each activity in the most
appropriate manner and these arealso helpful in accessing cost per unit as well as making
appropriate pricing decision.
Volume concept
Volume, in terms of manufacturing unit is refereed as the level and units of production
that are produced in a specific time period. There are various concepts that are associated with
the volume of production such as break even analysis, economies of scale and dis economies of
scale. These all the concepts are discussed here under:
Break even analysis
Break even point concept is used to determine the volume of production at which Merlin
Entertainments Plc will gain the situation of no profit and no loss (IMAM and Spence, 2016).
This method is considered as the one among the best methods for calculating the level of sales
over net income. In addition, this method is considered to be the best for attaining cost
efficiency. This is a point of production at which net revenue equals to the total cost. A
hypothetical example is given in respect with explaining Breakeven point concept in below.
Price per Unit $10
Variable Cost per Unit $5
Total Fixed Cost $10,000
We have,
p = $10
v = $5, and
FC = $10,000
BEP = Fixed cost / contribution
Contribution = Selling price – Variable Cost
Here , is a alternative formula for assessing breakeven point (sales units)
Breakeven Point in Sales Units (x)
= 10,000 ÷ (10 − 5)
= 10,000 ÷ 5
= 2000 units
BEP in Sales Dollars = $10 × 2000 = $20000
This concept is the most important for Merlin Entertainments Plc for assessing the level
of sales so as to cover fixed and variable cost. By making the use of such method, business entity
can manage expenses as well as can find out the ways to increase sales. In accordance with the
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results of Breakeven point method, decision of production level can be changed which will be
fruitful in generating higher sales as well as profit while making effective pricing decision.
Economies of scale
The cost advantage of manufacturing units are known as economics of scale which can be
attained by reducing the cost of production and increasing profits. Within the tourism industry,
the economies of scale can be achieved by increasing level of service hence, reducing cost. In
other words the economies of scale represents the relationship between quality production and
cost of production (Shim and et.al., 2008). In respect with the mentioned company, economies of
scale is all about increasing production volume and providing benefits through reduction in cost.
This is to bring into notice, when company achieves economies to scale, it become important to
separate the cost among the large number of units. At the same time, over a larger number of
goods it reduced the burden from the organization. Economies of scales help in decreasing the
variable cost per unit and increasing operational efficiency and synergies. While increasing the
production level company can attain economies of scale level and can attract more profits for the
organization.
Dis-economies of scale
From a in-depth indication, it has been noticed that in a long run economics of scale can
not be achieved however, while taking a huge initiatives the company has to make various
initiatives (Dlabay and Burrow, 2007). The marginal cost can be attained art the time increasing
the cost of production. There can be some reasons for achieving dis economies of scale that are
explained in the following points :
 In case a company is focusing on same level of production then it cannot focus on same
level of production. However, the company cannot achieve economies of scale and it can
not always manufacture the same unit for every time.
 This is all time negated that with an increase in production volume, the transportation and
warehousing cost also increases. This is a indication for organization to have dis
economies of scale.
1.2 Pricing methods used in the travel and tourism sector using Merlin Entertainments
Pricing decisions are the most crucial part for any industry as it determines the profit
level. However, to make a pricing decision is the most crucial aspect of an organization for
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which it uses various pricing methods. The explanation of such pricing methods are explained
below along with practical examples:
Discounted pricing
Discounted pricing is an important pricing method that can be used by the mentioned
company so as to increase the number of customers (McLaney, 2009). The company provides
discounts on the actual market prices so as to attract the customers and creating awareness
among large number of visitors. Merlin Entertainments can offer services at lower prices in off
seasons so that minimum level of profits can be attained. He use of such pricing method allows
management to create a distinct image in marketplace.
Cost plus pricing
The mentioned method is used for setting prices of products as services in accordance
with earning good amount of additional profits over the cost. Here is the example for cost plus
pricing calculation:
Calculation of cost per unit
Table 1 Cost per unit
Material in production £ 20,000.00
Labor charges £ 10,000.00
Total cost £ 30,000.00
No. of unit 500
Cost per unit 30000 / 500 £
60.00
Methods for calculating prices
30% mark up value
Table 2 Pricing
Total Cost £ 30,000.00
Profit percentage (30% On £ 9,999.00
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Cost)
Sales price £ 39,999.00
Sales value Per Unit £ 80.00
Profit earned in this strategy £ 9,999.00
Return on capital employed
Return on capital employed represents the measurement of company's profitability and
the efficiency with which its capital is employed. With the help of such ratio a business can
measure relative profitability after taking into account the amount of capital used.
Table 3 Profit
Capital employed 10000
Rate of return 20%
Profit 2000
Table 4 Pricing
Total Cost £ 30,000.00
profit ( Return on capital
employed) £ 2,000.00
Sales price £ 32,000.00
Sales value Per Unit £ 64.00
Profit earned in this strategy £ 2,000.00
However, the cost as per cost plus pricing is calculated to be £ 80 so company can earn
good profits at lower cost.
Market-led pricing- Market led pricing is an another method to calculate pricing and
delivering good quality of services at reasonable prices (Siano and et.al., 2010). The market led
prices is also known as competition based prices in which company focuses on providing
effective discounts to customers. In this methods, the prices are set while evaluating the prices of
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similar products available in the market. However, on the basis of product status in terms of
features in competitive scenario, the company may set prices higher or lower than the competitor
pricing. For example : in case Merlin Entertainments Plc adopts Market-led pricing then the
company will only focus on pricing and delivering good quality of services at reasonable prices.
Value adding pricing method
Value adding prices methods is a major concept of pricing that is considered as important
so the company can deliver good quality of services to large number of visitors. The prices of
products and services are to be included in respect with the value added features of a product and
services (Jonsson, 2008). However, Merlin Entertainments Plc is always seen focusing towards
towards maximising the cost of production while adding addition features which are further
covered through increasing final prices. Hence, with the help of such pricing methods the
company increases the value of products.
1.3 Factors influencing profit for travel and tourism businesses using Merlin Entertainments Plc
Large numbers of factors are present which influences profit of travel and tourism firm
like Merlin Entertainment Plc. Such factors are as follows which business must consider with the
motive to enhance its profitability level: Social environment: Environment in which Merlin entertainment carries out its
operations is quite complex and large number of challenges have to be faced by business.
Further, taste and overall preference of target market changes rapidly due to which it is
required for business to modify its services accordingly (James and Mainam, 2012).
Sometime, it may be possible that company does not alter its services due to which
overall profitability level is affected. By offering services as per culture and religion of
target market business can easily deal with the issue of change in social environment. Economic environment: Economic condition of the country also affects profitability
level of Merlin Entertainment. Further, current state of economy is not in favourable
condition where inflation and recession are adversely affecting business operations.
Further, due to inflation purchasing power of customers is directly affected and due to
this reason company has to decrease price of its services and this has direct impact on
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profits earned by business. Therefore, it can be said that economic environment has also
direct impact on profits earned by business (Clark and Hallerberg, 2012). Current trends: In travel and tourism sector it is necessary for every business to offer
services to target market as per current trends in the market. Further, Merlin
Entertainment Plc has to consider current trends where services must be modified
accordingly (Hansen and Guan, 200). By offering services as per need of target market it
is possible for company to earn higher profits. On the other hand, in case if business is
not able to offer services as per current trends then it becomes difficult for firm to survive
in the market.
 Poor planning: It is also regarded as one of the crucial factor which influences
profitability level of the business. Sometime, it may be possible that management of
Merlin entertainment is not able to prepare appropriate plans through which operations
can be carried out (Drake and Fabozzi, 2012). Further, practice of poor planning can lead
to decline in profitability level and staff members will not be able to carry out overall
operations which are also unfavourable for business.
Therefore, in this way these are some of the key factors which may influence profitability
level of the business and by considering them it is possible for company to deal with adverse
situation such as lower profits etc.
TASK 2
2.1 Different types of management accounting information that could be used in travel and
tourism businesses using Merlin Entertainments Plc.
Management accounting has significant presence in today's corporate scenario. The
management accounting includes various concepts such as budgets, variances as well as
allocating cost. The adoption of appropriate accounting method is important so as to attain the
business objectives (Cohen and Kaimenaki, 2011). The mentioned entertainment company is
going to take help of management accounting for satisfying the needs and wants of stakeholder
of business. This unit of accounting methods also helps in planning, formulating strategies and
adopting strict control of the company's operations. There can be various sources of information
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that assist company in explaining the implications of management accounting. The information
sources are presented hereunder :
Financial statements: Financial statements are also known as financial reports that
pertains the financial performance of a company for a specified pried of time (Bhowmik and
Saha, 2013). However, it also include the information of profitability, stability and liquidity
position. With the help of various financial statements including balance sheets, income
statement and cash flow statement. The companies are able to judge efficiency of business
operations with the help of such reports. In addition the position of company can be ascertained
with the help of such statements and these statements are important for satisfying information
needs of stakeholders.
Cost allocation reports: The cost allocation report is important to identify the various
cost during the business affairs and the a,location of such cost. This helps in identifying the
utilization of resources as well as proper allocation of funds to each activity. In addition to that
the organization has to focus on cost allocation of reports so that effective utilization of resources
can be made (Pike & Neale, 2003). With the help of cost allocation report that company can find
the information which is in relation to various costs that are involved in operations. Hence, the
reports are highly valuable in satisfying the needs of stakeholders.
Budgets: For the purpose of setting benchmarks and targets as well as to identify the
feasibility of set targets, the tourism entrepreneurs use various tools of management accounting.
Budget are the financial plans that are prepared by the company in order to attain desired
financial goals of company (Adams, 2006). The budgeted figures are helpful in creating targets
and adopting strict control for attaining the budgeted figures of company. In addition to that
budget is a tool of munitioning the financial performance as compared to previous decided plans
as variance analysis. Hence, It could be said that with the help of budget the mentioned company
can design future plans or managing financial resources.
2.2 Use of management accounting information as a decision-making tool for Merlin
Entertainments Plc
The use of management accounting information helps the business entities in taking
decisions pertaining to business. The major aim of Merlin Entertainments to decide provide the
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quality services to the customers as well as to attain good profits. The management accounting
information is helpful for making decision in regard to the development of new products as well
as expansion of business (Mistry, Sharma and Low, 2014). The company can also take the
decisions for reducing cost of production while making use of such information contains in
management accounting tools. The information included in budgets is helpful in making
decisions over the future courses of actions and ways to cut down the variance in actual and
budgeted figures. The assessment of future income and expenses can be identified with the help
of budget. The negative variance can be worked upon as well as the future courses of actions can
be designed. The budget are also helpful in assessment of Further, the company can allocate
financial resources that surely facilitates a effective control on expenses. Furthermore ,financial
and accounting information is helpful in making effective investment decisions. On the basis of
management accounting information and availability of funds the company can decide over
investing funds in new project as well as making investment for growth and expansion decision.
The cost analysis of business can be done on the basis of such information and the company can
take decisions for selling and purchasing. The major decision in respect with prices of services
are taken (Halabi and Carroll, 2015). The preparation of budgets can be made on the basis of
financial information so as to make future plans and strategies. In respect with the Merlin
Entertainments Plc, this could be said that Budget will be helpful in assessing the availability of
finance as well as deficit or surplus.
TASK 3
3.1 Financial accounts of The Restaurant Group (TRG) Plc for the year ended 28 December 2014
showing at least two years performance
Ratios Formula 2013 2012
Profitability ratios
Gross profit 106 95
Operating profit 31 29
Net profit 108 96
Net Sales 580 533
Gross Profit Ratio (Gross Profit/ Net Sales) *100 18.28% 17.82%
Operating Profit Ratio (Operating Profit/ Net Sales) *100 5.34% 5.44%
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Net Profit Ratio (Net Profit/ Net Sales) *100 18.62% 18.01%
Liquidity ratios
Current Assets 35 40
Current Liabilities 115 105
Closing Stock 5 5
Current Ratio Current Assets / current Liabilities 0.30 0.38
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 0.26 0.33
Efficiency Ratios
Net Sales 580 533
Total Assets 399 360
Total Assets Turnover
Ratio Net Sales/ Total Assets 1.45 1.48
Cost of goods sold 474 437
Inventory 5 5
Inventory Turnover ratio COGS/Inventory 94.80 87.40
Gearing ratios
Debt 49 49
Equity 216 184
Debt Equity Ratio Debt/ Equity 0.23 0.27
(Annual Report, 2013)
The financial information is excreted from the annual reports of annual report of TRG
The restaurant group Plc. From the ratio analysis, It can be seen that the gross profits of company
has been increased in the years 2013 as compared to previous years, however, operating ratio is
decreased. The gross profits and net profits of company have been increased (The Restaurant
Group plc, 2014). The gross profit ratio for the company was 17.82% in 2013, that was increased
to 18.28% in 2013, means the net sales of company is improved at the same time the cost of
production is significantly reduced for the period. In respect with the liquidity position of
company, it can be said that quick ratio is decreased indicating that the company has loss the
ability to pay short term debts ion cash. In addition to that debt equity ratio decreased in previous
years. In terms of efficiency of business, total Assets Turnover Ratio is decreased however,
Inventory Turnover ratio is significantly improved (Merlin Entertainments, 2016).
TASK 4
4.1 Sources and distribution of funding
Various effective sources are present which business can undertake with the motive to
develop heritage site which has been chosen as one of the capital project. Department of culture
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is regarded as one of the most effective source where business can take financial support from
this department. Further, main role of department of culture is to provide funds to company if
they are investing funds in any cultural project. This source is quite beneficial for development
of heritage site and large amount of funds can be obtained easily. Regional development fund is
also one of the most appropriate source where regulatory authorities provides fund to the firm if
they are undertaking any capital project through which development of heritage site. (Gandhi,
and Shankar, R., 2016). So, this source can also provide large amount of support to business
where it becomes easy to implement the capital project in appropriate manner and in turn is
favourable for the business in every possible manner. Apart from this, non governmental bodies
are also present in the nation who provide financial support to business when they undertaken
any project of heritage site which is for the development of nation and boosts economy.
Generally people living in the society are highly attracted towards the heritage sites as they are
totally unique and this provides them remarkable experience. Further, government and other type
of bodies also supports firm to undertake projects such as development of heritage sites etc. This
can be beneficial for business and response from target market can be gained easily (Rahadi and
et.al., 2015).
CONCLUSION
In the above report, the importance of costs and volume in financial management of
travel and tourism businesses for Merlin Entertainments Plc is explained. The management
accounting information is helpful for making decision such development of new products,
investments for expansion, cost benefits analysis and so on. It was found that, the budgeting
process helps in development of financial plan as with the helps of budgets the company can find
out inflow and outflow of cash for a future time of span. The financial performance of company
is improved from previous years. The sources and distribution of funding are helpful in
supporting tourism firms to allocate more funds in promoting culture of the nation so that other
nations can know about it easily.
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Online
Annual Report, 2013. [PDF]. Available through:
<http://www.trgplc.com/sites/default/files/file/TRG_AR13.pdf>. [Accessed on 18th January
2016].
Merlin Entertainments, 2016. [PDF]. Available through:
<http://www.merlinentertainments.biz/brands>. [Accessed on 18th January 2016].
The Restaurant Group plc, 2014. [PDF]. Available through:
<http://www.trgplc.com/sites/default/files/file/Interim%20Report%202014.pdf>.
[Accessed on 18th January 2016].
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