Financial Decision Making for Travel and Tourism: TUI Expansion Plan

This report provides a financial analysis of TUI Group, a leading travel and tourism company, focusing on its expansion plans. It discusses relevant sources of finance, both internal and external, for funding the expansion, recommending bank loans due to the company's strong profit position. The report explains the behavior of costs, using graphs and examples, and emphasizes the importance of Cost Volume and Profit (CVP) analysis as a decision-making tool for setting standards and analyzing output for effective returns. Furthermore, it discusses and recommends appropriate pricing strategies, advocating for full-cost pricing to effectively plan and implement expansion strategies. This analysis is critical for TUI to meet cost recovery requirements and establish itself in new markets. Desklib provides access to similar reports and study tools for students.

FINANCIAL DECISION MAKING
FOR TRAVEL AND TOURISM
1

Executive Summary
The assignment consists of brief about the TUI Group. The company is looking to expand the
operation so that there is an increase in the market they capture. There is also the inclusion of the
sources of the funds that can be generated for the expansion and best suited. The analysis of the
cost volume and profit is also stated along with its importance in the analysis of the decision. The
pricing strategies are also included in the assignment along with the recommendation which can
be best suited for the organization.
2

Table of Contents
Executive Summary.......................................................................................................................2
Introduction....................................................................................................................................4
LO1..................................................................................................................................................5
i. A discussion and a recommendation of relevant sources of finance in context of the
expansion plan............................................................................................................................5
LO2..................................................................................................................................................7
ii. An explanation of behaviour of costs (using graphs and examples) and the importance
of..................................................................................................................................................7
LO4................................................................................................................................................10
iii. A discussion and recommendation of appropriate pricing strategies available within
the..............................................................................................................................................10
Conclusion....................................................................................................................................12
Bibliography.................................................................................................................................13
3

Introduction
The TUI Group is a tourism company which is headquartered in Germany. The company is
engaged in various business related to travel and tourism. It is largest Travel and Tourism
Company having Hotels, airlines, cruises, and stores. The company is focussed on providing top
class services to the clients. The company is well established with the strong financial position.
The company operates more than 325 hotels and establishment in 30 countries (TUI Group,
2018). The company is focussed on digitalization of the process and also launched to IT-
initiatives. Company turnover has increased by a margin of approximately 11.7% and EBITA by
a margin of approximately 12%. The company has also provided the dividend to the shareholders
with an increase of approximately 33.7% underlying EPS.
4

LO1
i. A discussion and a recommendation of relevant sources of finance in the context of the
expansion plan.
The sources of finance are very important in case of expansion plan due to heavy funds required
for it. The sources of acquisition can be internally and externally as per the requirement. The
funds can be acquired depending on the time period. Internal sources of the fund can be defined
as which are generated by the business whereas external sources are generated from outside the
organization which can be categorized as a short, medium and Long-term. Internal sources of
funds includes the retained profit, sale of assets, sales of new share and right issues whereas
external sources include Bank loan, Bank overdraft, Venture capital, debt factoring, Business
Angels etc. (Croce & Gatti, 2014) There are various advantages and disadvantages associated
with the fund that is being selected by the company. It is important that after considering those
implications company must acquire the funds.
TUI has already established company engaged in the various sector related to the travel and
tourism business. The company is able to earn a good profit during the year and also able to
provide a good return to the investor. The company can opt for the equity share capital for the
generation of funds. It is a good option as there is no interest cost associated but it is a long-term
fund. It can also to its existing shareholders to repay the debt but since the company is in good
profit position there is no such need for the right issue (Jennings, 2018). There is various
dividend policy which affects the profits to be distributed to shareholders. The company can look
forward to retaining the profit earned for the purpose of reinvesting it in business. The external
sources can also be considered such as the bank loan or overdraft which attracts the interest cost.
The interest can be variable and fixed thus affecting the variable and fixed cost of the company.
Leasing can also be an option in which the assets are acquired on rent. It has an advantage of
early access to using the assets but can also be expensive (Jennings, 2018). The factors such as
the debt financing and factoring can be used or venture capitalist which is 49% owned by them.
It is important to analyze the current situation of the company to choose the best viable sourcing
fund in terms of cost associated with it as well as the benefit that is being provided.
5

Recommendation
The company is earning a very good profit, therefore, there is no need to consider the factors
such as the venture capitalist, Business angels etc. which help in starting the business. The TUI is
a well-established therefore the company can look forward to considering the funds through the
equity or through the loans from banks and financial institution. The debt position of the
company looks satisfactory as the financial liability of the company is 1761.2 Million Euro
whereas the shareholder's equity of the company 3533.7 Million Euro. It will be suitable for the
company to adopt the funding for the expansion through the bank loans with the minimal interest
rates.
6

LO2
ii. An explanation of the behavior of costs (using graphs and examples) and the importance
of Cost Volume and Profit (CVP) analysis as a decision-making tool
The cost can be defined as the expenses that are being incurred by the organization for providing
the product and services. The cost can be classified in the research and development,
administration, production and sales and distribution expense. The cost can be divided into direct
and indirect cost where direct cost is the cost which can be considered in specific cost object
whereas indirect cost cannot be specified. The cost can be divided on the basis of the time and
product. The costs which are attributable to the product are known as product cost and which
cannot be attributable are known as Period cost. Cost can be variable or semi-variable as well as
fixed and stepped fixed cost (Markgraf, 2018). There is various another cost also such as
Incremental cost, controllable cost etc.
The Variable cost changes in proportion to the units that are being produced whereas the fixed
cost remains same even if the unit produced are changed. Semi-variable cost is the type of cost in
which both the elements are there that is fixed as well as variable whereas in case of the Stepped
fixed cost it remains constant till a point of the stage and then increases.
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(Figure – 4 types of Cost Graph presentation)
(Source – (Lumen, 2014)
Cost, volume, and profit are the main aspects of the organization which affects the decision
making of the company. Volume refers to the output which is best suitable for the company to
gain the maximum profitability. There are various theories related to the cost and volume such as
the economies of scale which states that there is a decrease in cost of production with an increase
in the production whereas the diseconomies of scale state that there is a decrease in the cost but
after a certain point, there is an increase in the marginal cost of the company. It is important that
there is an effective analysis of the cost and volume of the organization to get the maximum
profitability.
CVP Analysis helps in understanding the impact that volume have on cost and profit depending
upon the various assumptions which are that all the other variables remain constant; the profit is
being determined depending upon variable costing basis etc. The CVP is helpful in taking the
decisions by the formulation of the budgets (Navaneetha et al., 2017). The budgets are helpful
in coordinating with the various departments increasing the productivity and efficiency and by
motivating the managers. TUI can also set the standards for the expansion relating to the cost and
volume. The company can look forward to analyzing the output that needs to be generated for an
effective return. The CVP Analysis helps in decision making at the managerial level regarding
the performance of the organization as a whole as well as individually.
8

(Figure – Breakeven Point Graphical presentation)
(Source – ToughNickel, 2016)
It is also helpful in determining the break-even point which can be defined as the output at which
the cost and revenue both are equal. TUI can be facilitated through it as it will help them to take
a decision regarding the consumers that they need to target for recovering the cost that is being
incurred through the expansion process. TUI can take a decision regarding the sales and
occupancy of the cruises and hotels in order to sustain and recover the cost (Abdullahi et al.,
2017). The company is well established but the analysis of the cost at the time of expansion is
necessary for the formulation of the plans and procedures. It is used in determining the future
prospect and growth.
9

LO4
iii. A discussion and recommendation of appropriate pricing strategies available within the
context of your chosen organization
The pricing strategies are important to the time expansion as the organization must meet the
requirement of recovering the cost as well as to establish in the new market. The pricing strategy
needs to be effective and requires proper strategy and analysis of financial as well as non-
financial factors surrounding the organization. There are various factors which need to be
considered such as the cost involved in the promotion, Quality provided, product life and its
credit period etc. (Toni et al., 2016). The prices and profit are linked to each other. Higher the
prices in comparison to the cost incurred higher is the profit earned by any organization. There
are different types of pricing strategies that can be considered for the effective setting of price
which is as follows-:
Full Cost Pricing (Absorption costing) – Full costing price can be determined as the cost
determined after consideration of the direct cost of the price of the product. It is the traditional
method of cost which is used to determine the gross profit that the company is earning. The price
can be set on the basis of the objectives of the company (Thompson, 2018). The overhead costs
are included in the inventory available at the end and not charged as the period cost. The TUI can
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Cost +
Pricing
Full Cost
Pricing
Marginal
Cost pricing

be benefitted as it is a simple method and can also be given at the lower level of the
management. It will also help the organization to estimate the profit that can be earned if the
budget is achieved by them. The Full cost pricing is generally kept for the purpose of long-term
thus avoiding the recalculation of the prices for the short term purposes. It will help in earning
the profit at the time of expansion due to various travel and tourism spot are available to them.
There are some unfavorable effects such as ignorance of the incremental cost and relation
between the Price- Volume relationships.
Marginal Cost Pricing – The marginal cost pricing strategy can be defined as the extra cost that
is required for the production of the product or providing of services. The variable cost is
considered by the organization for determining the contribution that is being provided by each
unit. It does not include the total cost that is being incurred for the production of the single unit.
The Marginal cost is useful in determining the breakeven point for the benefit of the planning of
strategy (Thompson, 2018). While establishing it is important that the pricing is set for the short
term due to the analysis of factors which is possible through the Marginal cost price. There is a
disadvantage that the company might not able to recover the fixed cost that is involved thus
affecting the Liquidity of the company. The company can face losses even after getting a
contribution from the units sold.
Recommendation
It can be recommended that the full cost pricing is more effective and efficient for the company.
The fixed cost is considered which will help the company to prepare the plans and strategies
effectively and efficiently. It is easy to understand thus resulting in proper analysis of the factors
and then deciding the particular pricing of the product. It will also benefit in the setting an
effective price as all the costs are included it. It can be recommended that the full costing
strategy will help in deciding effective and efficient price resulting in the recovery of the cost
that is being incurred by the organization.
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Conclusion
It can be concluded with the help of the report that the company can attain the sources of the debt
due to the strong financial position. The cost, volume, and profit help in determining the
appropriated volume and also the strategies that facilitate the decision making of the company.
The pricing strategy is important for getting the profit that is being earned. The full cost pricing
strategy is useful for the organization as it covers all the cost.
12

Bibliography
 Abdullahi, S.R., Sulaimon, B.A., Mukhtar, I.S. & Musa, M.H., 2017. Cost-Volume-Profit
Analysis as a Management Tool for Decision Making In Small Business Enterprise
within Bayero University, Kano. IOSR Journal of Business and Management, 19(2),
pp.40-45.
 Croce, R.D. & Gatti, S., 2014. Financing infrastructure – International trends. OECD
Journal: Financial Market Trends, 2014(1), pp.123-38.
 Jennings, R., 2018. Sources of Finance and Their Advantages & Disadvantages. [Online]
Available at: http://smallbusiness.chron.com/sources-finance-advantages-disadvantages-
14407.html [Accessed Saturday March 2018].
 Lumen, 2014. Managerial Accounting. [Online] Available at:
https://courses.lumenlearning.com/tcc-managacct/chapter/cost-behavior-vs-cost-
estimation/ [Accessed Saturday March 2018].
 Markgraf, B., 2018. Importance of Costing in Managerial Decision Making. [Online]
Available at: http://smallbusiness.chron.com/importance-costing-managerial-decision-
making-51739.html [Accessed Saturday March 2018].
 Navaneetha, et al., 2017. An Analysis of Cost Volume Profit of Nestlé Limited.
Management and Administrative Sciences Review, 6(2), pp.99-103.
 Thompson, S., 2018. Differences Between Full-Cost & Marginal-Cost Pricing Strategies.
[Online] Available at: http://smallbusiness.chron.com/differences-between-fullcost-
marginalcost-pricing-strategies-66005.html [Accessed Saturday March 2018].
 Toni , D.D., Milan, G., Saciloto, E.B. & Larentis , F., 2016. Pricing strategies and levels
and their impact on corporate profitability. Management journal, 52, pp.120-33.
 ToughNickel, 2016. Disadvantages and Advantages of Break-Even Analysis. [Online]
Available at: https://toughnickel.com/business/Breakeven-analysis [Accessed Saturday
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March 2018].
 TUI Group, 2018. Annual Report. [Online] Available at:
http://annualreport2017.tuigroup.com/sites/default/files/downloads/
TUI_AR_Annual_Report_2017.pdf [Accessed Saturday March 2018].
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