Finance and Funding in Travel and Tourism: EUROCARIB Report

This report delves into the financial aspects of the travel and tourism sector, using EUROCARIB Tours as a case study. It begins with an examination of Cost-Volume-Profit (CVP) analysis, highlighting its significance in financial management, including break-even point calculations and its role in decision-making. The report then analyzes various pricing methods applicable to EUROCARIB, such as cost-based, market-oriented, and penetration pricing, considering their implications for competitive advantage and market share. Furthermore, it identifies factors influencing profitability, including political, social, and economic environments, seasonal variations, and current trends. The study explores the types of management accounting information utilized by EUROCARIB, including financial statements and their application, alongside investment appraisal techniques. Finally, it assesses the financial statements of a competitor, Thomas Cook, using ratio analysis to evaluate profitability, liquidity, and investment performance, and discusses funding sources for developing a new hotel.

FINANCE AND FUNDING IN
THE TRAVEL AND
TOURISM

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Concept of CVP analysis and its importance in the financial management of EUROCARIB
................................................................................................................................................1
B. Analysis of different pricing methods that EUROCARIB can use to determine price.....2
C. Analysing factors that will influence the profitability of EUROCARIB..........................3
TASK 2............................................................................................................................................5
A. Different types of management accounting information used by EUROCARIB............5
B. Using investment appraisal techniques as decision- making tool.....................................7
TASK 3............................................................................................................................................8
A. The main financial statements of Thomas Cook and interpret the financial statements
using ratios..............................................................................................................................8
TASK 4............................................................................................................................................9
A. Sources and distribution of funding the company for development of New Hotel.........9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12
Appendix........................................................................................................................................14

INTRODUCTION
This study is based on finance and funding in travel and tourism sector. Finance and
funding is related to different sources of funds which are available for organisation to conduct its
various activities. This assignment is based on EUROCARIB TOURS which is a London based
travel company providing various services to its customers such as travel services,
accommodation services, food services etc. This travel organisation is going to conduct a
summer trip to a Caribbean holiday. This assignment will include the concept of CVP analysis
and explain its importance in the financial management of tourism organisation. This study will
include analysis of pricing method to charge it from tourist. Furthermore, it will include different
types of management accounting. This assignment will also include about financial statement
prepared by tourism organisation in order to identify ratios for profitability, liquidity and
investment. Moreover, it will include sources and application of fund available for EUROCARIB
to build a hotel.
TASK 1
A. Concept of CVP analysis and its importance in the financial management of EUROCARIB
Cost- volume profit analysis is a method of determining changes in cost and volume
which affect the operating income of organisation. CVP method is used to classify the expenses
into fixes and variable expenses. CVP analysis assist in analysing the relationship between cost
and profit to volume of business to gain more profits (Alegre and Sard, 2015). Cost- volume
profit analysis is important in financial management as CVP analysis assist in identifying
predication of cost and profit for different volume of activity. Cost volume profit assist in
making flexible budgets.
This analysis assist in performance measurements to control deviations in performance.
Cost volume profit analysis is importance as it helps in managing the financial resources by
identifying actual cost and volume (Denizci and Mohammed, 2015). This analysis assist
EUROCARIB by analysing these factors as it affect the profitability of this firm. Cost volume
profit analysis by breaking cost into fixed and variable cost helps EUROCARIB in providing
information about profitability of their products and services.
This analysis helps in decision – making regarding different financial resources to utilise
them properly in order to make high profits. This analysis includes various assumptions such as
sales -per unit is constant, variable cost per unit is constant and fixed cost per unit is constant.
1

This analysis provide EUROCARIB about the amount that is remaining after deducting the
variable expenses from sale revenue that is known as contribution margin. This amount is used to
recover fixed cost and than the amount remain is regarded as profits for the organisation. CVP
analysis include break -even point which is regarded as no profit no loss point where company is
no profits but also there are no losses. The cost volume profit analysis assist EUROCARIB in
determining the break even point which is considered as level of sale where the company have
incurred no loss and not made any profits.
D 1 :
Particulars Formula Figure (in £)
Fixed cost (FC) 120000
Desired profit margin (DP) 30000
Selling price per unit (SPU) 1600
Variable cost per unit 400
2
Illustration 1: Cost volume profit
(Source : Cost volume profit (CVP) Analysis, 2015)

(VPU)
Contribution (CPU) SPU - VCPU 1200
BEP (number of customers) FC / CPU 120000 / 1200 = 100 customers
BEP (in £) BEP (number of customers) *
SPU
100 * 1600 = 160000
Number of tourist need to be
served for getting desired
profit margin
(FC + FP) / CPU (120000 + 30000)/ 1200
= 125
On the basis of above computation it can be interpreted that break even point for number
of customers is calculated by dividing the fixed cost by contribution per unit which is 12000/
1200 which provided with break even point as 100 customers where Eurocarib will have no
profit no loss. Also, BEP in Monetary terms is 160000. Furthermore, Eurocarib in order to earn
the profit of £30000 must have number of tourist equal to 125 to earn thee desired profit margin
which is calculated by summing the fixed cost with desired profit and dividing it by
contribution which provided with number of tourist to earn the desired profit margin.
B. Analysis of different pricing methods that EUROCARIB can use to determine price
Pricing methods are the techniques used by organisation in order to determine the price of
products and services offered to customers. Price of the product is determined after analysing
different factors such as market conditions, purchasing power of customers , cost incurred in
making that products etc. These pricing methods consist of cost based pricing, market – oriented
pricing and penetration pricing method. Cost – based pricing method : Cost based pricing refers to the method of pricing in
which a fixed sum of total cost is added to the cost of product in order to identify the
pricing method. Cost – based pricing include the percentage of desired profit in order to
determine the final price of product and services offered to customers (Fisher, Gallino
and Li, 2017). This pricing method is classified into two : cost – plus pricing and markup
pricing. Cost plus pricing refers to fixed percentage of total cost which is added to total
cost in order to determine the price of product. Markup pricing in which fixed amount of
cost of the product is added to product price in order to determine the selling price of
3

product. EUROCARIB can use this pricing method in order to set the price of its travel
packages for the summer Caribbean holiday. This method will help in determining the
price of the product easily without much calculation as it require less information for
determining the price of product. Market – oriented pricing : This method of pricing is adopted by organisation in order to
determine the final price of the product by considering the existing market conditions
such as competitors price of the products and services etc. Organisation determines the
product price by identifying the prices existing in the market and then setting the final
price to gain a competitive advantage (Methods of Pricing: Cost-Oriented Method and
Market-Oriented Method, 2017). EUROCARIB in order to gain the competitive
advantage and attract more customers towards the brand can use this pricing method by
analysing its competitors price of the product and services and then setting its price of the
products and services.
 Penetration pricing : Penetration – pricing method is used by organisation in order to
gain more market share by entering the market with low price of the products and
services as compared to its competitors. Penetration pricing methods is used by
enterprises in order to attract more customers towards the brand (Gold And et.al., 2015).
This pricing methods helps in attracting more customers specially price sensitive
customers and then raising the price of the product when the organisation has captured
the market. EUROCARIB tours in order to increase their customer base can use this
pricing method by entering the market using low prices of the packages and services such
as accommodation, food services , transportation services etc. and once the market share
is gained and EUROCARIB can increase its prices of the products and services.
C. Analysing factors that will influence the profitability of EUROCARIB
Factors that have their impact on the profitability of firm consist of political environment,
social; environment, current trend, seasonal variation and economic environment.
 Political environment : Political environment have its influence on the profitability of
EUROCARIB as there are various rules and regulation which affect the business of this
organisation. Political factors affect the profitability of EUROCARIB travel as there are
various policies formulated by government regarding taxation, political instability which
causes reduction in the profitability of travel and tourism company (Gurtner, 2016). This
4

factors affect the organisation by imposing the high tax rate on the transportation of
passengers from one place to another due to which firm is having low profits remain
with it. EUROCARIB in planning for a summer Caribbean holiday on which organisation
have to pay taxes to government to conduct this tour due to which there is less profit
margin available for the enterprise.
 Current trend : This factor have a great impact on the business of travel and tourism
because market trend changes day by day on the basis of customers preferences. Current
trends include increasing booking through online web portals , increasing trend of
sustainable tourism, increasing trend of adventure travel , increasing activeness of people
regarding wellness trips etc. This trends will have great impact on the profitability of
travel organisation (Vellas, 2016). EUROCARIB will be affected by these factors as
increasing changes in trend will affect its demand in the market as customers will prefer
those travel enterprises which are following the trend and conducting travel according to
the trend existing inn the market.
 Social environment : Social environment have its influence on the profitability of
EUROCARIB as this factor include customers preference and their demands.
EUROCARIB is affected by this factor if the product and services provided by the
organisation is not according to the demand of customers and according to their
preference which will reduce their customer base that will directly affect the [profitability
of EUROCARIB.
 Seasonal variation : Seasonal variation affect the travel and tourism profitability as most
travel destination are related to some particular season. Travel is low season attract low
rates and travel in high season attract higher rate (DiGioia And et.al., 2016). In low
season , EUROCARIB will have low profits due to which its profitability is affected by
that season. Seasonal variation affect the tourism business because particular season is
preferred by tourist for the tour due to which in other season organisation faces losses.
EUROCARIB in order to attract more profits must analyse these factors in order to
reduce chances of losses by producing the products according the customer demands.
EUROCARIB in low season must reduce the price of its tour packages in order to attract tourist
for the travel.
5

TASK 2
A. Different types of management accounting information used by EUROCARIB
Management accounting information assist in providing information about various
activities of management such as information relating to financial statements, future budget
etc(Smith, 2014).
 Financial statements : Financial statements are the reports prepared by the organisation
in order to know about the position and different activities of operations of
enterprises .Financial statements help the organisation in identifying the profit and loss
of pertaining to a period. These statements consist of income statement, balance sheet
and statement of cash flows. Income statement in financial statements consist of
operating expenses and operating incomes in order to find out the net profit or loss for
the period. Balance sheet consist of assets and liabilities of the organisation in order to
identify the financial position of the firm on a particular point of time (Weiss and et.al.,
2018). Statement of cash flow includes operating activities, financing activities and
investing activities in order to know about the cash inflows and outflows for a specific
period. Financial statement will assist EUROCARIB in identifying its profit and loss of
the period. Financial statements will assist EUROCARIB in providing information to the
investors and customers about the company's financial performance to attract more
customers for the travel.
 Variance analysis: Variance analysis is related to comparison between actual expenses
with the estimated expenses in order to identify the deviation in the expenses to correct
them to match the actual expenses with the budgeted. Variance budget can be used by
EUROCARIB to compare the actual expenses incurred by the organisation in the travel
with the budgeted to identify the profit and loss of the organisation.
 Forecasting : Forecasting in management accounting information is related to planning
for future operation by using forecasts. Forecasting helps the organisation in identifying
the various activities of the firm which will be performed by enterprise in the future
(Schuckert, Liu and Law, 2015). Forecasting is based on the past activities of the firm in
order to identify the future profit and loss. EUROCARIB by using forecasting can
identify its future sales and revenue through trend analysis. EUROCARIB with the help
of forecasting can determine the sale of its future travel packages etc.
6

EUROCARIB by using this management accounting information can improve its
operation for generating more revenues and also to gain more market share by attracting more
customers towards the brand. This accounting information will assist EUROCARIB in
improving its performance and also helps in identifying its performance on the basis of different
financial reports.
Eurocarib by Using variance analysis as management information that will helps the
organisation in improving its future performance. Eurocarib by using variance analysis for
measuring its performance can improve its performance and increase its profitability by
measuring the variance and then taking corrective measures to reduce the deviations. Also, it can
use other methods of information to improve its future performance that includes budgeting,
forecasting, financial statement etc.
7

B. Using investment appraisal techniques as decision- making tool
For instance: Eurocarib has two projects with the initial investment of £180000 respectively. In
this, by using investment appraisal tools firm can take decision about the selection of capital
project:
Project A
Computation of NPV
Year Cash inflows
PV
factor
@ 10%
Discounted
cash
inflows
1 52000 0.909 47273
2 59000 0.826 48760
3 56500 0.751 42449
4 67000 0.683 45762
5 76000 0.621 47190
Total discounted cash inflow 231434
Initial investment 180000
NPV (Total discounted cash inflows - initial
investment) 51434
Project B
Year Cash inflows PV factor @ 10%
Discounted
cash inflows
1 49000 0.909 44545
2 54000 0.826 44628
3 51000 0.751 38317
4 58000 0.683 39615
5 66000 0.621 40981
Total discounted cash
inflow 208086
Initial investment 180000
8

NPV (Total discounted
cash inflows - initial
investment) 28086
Outcome of investment appraisal assessment clearly shows that business unit will
generate positive and high returns by investing money in project A over the other alternatives.
Thus, company should focus on investing money in project A which in turn proves to be more
profitable for the firm.
TASK 3
A. The main financial statements of Thomas Cook and interpret the financial statements using
ratios
Profitability ratio: Profitability ratio are those which shows the earning capacity of the
organisation. Profitability ration includes gross profit ratio, net profit ratio and return on capital
employed.
Ratio analysis of Thomas Cook for the year ended on 2016 and 2017
Profitability ratio analysis
2016 2017
Gross Profit 852 937
Net profit 12 13
Sales revenue 7812 9007
Earnings before interest and tax or
operating profit 236 267
Capital employed 366 281
Net income 12 13
Average total assets
GP ratio Gross profit / sales * 100 10.9% 10.4%
NP ratio Net profit / sales * 100 0.15% 0.14%
Return on capital employed EBIT / capital employed 64.48% 95.02%
On the basis of this report it is interpreted about profitability ratio. This ratio has
interpreted that in 2016 the gross profit ratio of the Thomas Cook was 10.9% which has been
decreased to 10.4% in 2017. This report has also interpreted that the net profit ratio of firm in
2016 was 0.15% which decreased to 0.14% in 2017. Furthermore, this report has interpreted that
return on capital employed in 2016 was 64.48 % which was increase to 95.02 % in 2017. This
indicated that Eurocarib is return which will be generated from capital employed in the firm will
9

be profitable for the organisation. Eurocarib in order to improve the profitability ration can
reduced its expenses in order to increase its incomes. Also, it is suggested to eurocarib to
improve its various operation s and reduce the expenses.
Liquidity ratio analysis
2017 2018
Current assets
2,65
6 2,241
Current liabilities
4,63
0 4,325
Inventory 43 42
Prepaid expenses 340 401
Quick assets 2273 1798
Current ratio Current assets / current liabilities 0.57 0.52
Quick ratio
Current assets - (stock + prepaid
expenses) 0.49 0.42
On the basis of this report it can be interpreted that current ratio which is reduced by
dividing current assets from current liabilities is 0.57 in 2017 which has been reduced to 0.52 in
2018. This report has also interpreted that quick ration which was 0.49 in 2017 has been reduced
to 0.42 in 2018. This ration shows the liquidity of the organisation. This shows the ability of the
organisation to meet its financial obligation. It is suggested to eurocarib that it must increase its
current assets in order to be able to pay its obligation. This will help the company in increasing
the current ratio and quick ratio. Organisation can improve its liquidity position by maintaining
the level of current assets more than kits current liabilities.
TASK 4
A. Sources and distribution of funding the company for development of New Hotel
There are two sources of funds used by EURUCARIB to raise the fund for developing
the new hotel which will cost £25 million. This two sources consist of internal sources and
external sources through it can raise fund for operating this activity. Internal sources of funding
is related to those sources which are generated from within the organisation and external sources
of funding is related to those funds which are available outside the organisation (8 Sources of
Funds to Raise Long Term Capital (With Diagram), 2016). Internal sources include sale of stock
10