Financial Decision-Making for Travel and Tourism in Japan Report

This report focuses on financial decision-making for Titan Travel, a UK-based travel and tourism company, specifically regarding its expansion into the Japanese market. The report begins by discussing various funding sources, including retained earnings, a mix of retained earnings and equity financing, equity financing, and bank borrowings, recommending the first two options. It then explains cost behavior, differentiating between fixed, variable, and mixed costs, while highlighting the importance of cost-volume-profit (CVP) analysis as a decision-making tool. The report provides examples of cost behaviors and a CVP analysis for the expansion plan. Finally, it analyzes potential pricing strategies, recommending the penetration-pricing strategy to increase revenue and address competition in the Japanese market. The report aims to provide a comprehensive financial framework for Titan Travel's expansion, considering various financial aspects.

Running head: FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
Financial Decision-Making for Travel and Tourism
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
Executive Summary:
The current report aims to deal with choosing an organisation in the travel and tourism
industry of UK. Therefore, for fitting the purpose of this assignment, Titan Travel has been
selected as the organisation, since it is one of the leading escorted tour operators in UK. It is
operating for more than 30 years and it has offered inspirational escorted tours across various
global nations. For expanding its business operations in Japan, Titan Travel needs to consider a
variety of factors in relation to the methods used for raising funds. However, it needs to exercise
adequate care for dealing with nuances in Asia in terms of labour, new facilities and suppliers.
The various cost behaviours have been described in the report, in which it has been found
that for this specific expansion plan, fixed costs and variable costs would be incurred, while the
mixed costs would not be taken into consideration. Finally, it is recommended to the organisation
to adopt penetration-pricing strategy in the Japanese market for increasing its revenue base to
cope up with the existing and upcoming competition.

2FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
Table of Contents
Introduction:....................................................................................................................................3
Discussion and recommendation of relevant sources of finance in context of the expansion plan:3
Explanation of the behaviour of costs and importance of cost-volume-profit (CVP) analysis as a
decision-making tool:......................................................................................................................6
Discussion and recommendation of appropriate pricing strategies:..............................................10
Conclusion:....................................................................................................................................11
References:....................................................................................................................................13

3FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
Introduction:
The current report aims to deal with choosing an organisation in the travel and tourism
industry of UK. Therefore, for fitting the purpose of this assignment, Titan Travel has been
selected as the organisation, since it is one of the leading escorted tour operators in UK. It is
operating for more than 30 years and it has offered inspirational escorted tours across various
global nations. The customers could select from a range of options with above 300 individual
itineraries constituting of rail, coach, air and river or ocean cruising elements (Titantravel.co.uk
2017). The company is planning to expand its business operations in the market of Asia,
especially Japan for accomplishing efficiency and competitive advantage in the global market.
The report would highlight the various sources of funding that Titan Travel could seek
for expanding its business operations in Japan. The second section would focus on explaining the
cost behaviour and significance of cost-volume-profit analysis for making useful decisions. The
final section of the report would shed light on recommending suitable pricing strategies in the
context of the expansion plan for Titan Travel.
Discussion and recommendation of relevant sources of finance in context of the expansion
plan:
For expanding its business operations in Japan, Titan Travel needs to consider a variety
of factors in relation to the methods used for raising funds. However, it needs to exercise
adequate care for dealing with nuances in Asia in terms of labour, new facilities and suppliers
(Becker 2016). The following are the major sources of funding available to Titan Travel for its
proposed expansion plan:
Retained earnings:

4FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
In relation to the sources of finance reviewed, retained earnings are the top selection for
Titan Travel. The main reason behind selecting this source is that the accumulated cash of an
organisation signifies effective use of funds, in which the expected return would be higher
compared to the interest earnings (Buckley and Mossaz 2016). In addition, the funds that Titan
Travel would invest in its operations, denoted through expansion in Japan, have other
advantages. The first benefit is control, in which the use of retained earnings for investment in
Japan expansion project irrespective of the type denotes that Titan Travel has control over its
funds. However, the case might not be the same in terms of investment in financial vehicles
using idle cash (Cohen 2016).
In choosing retained earnings, the organisation has adequate cash, which does not deplete
its financial reserves. A major benefit of using retained earnings is that relying on the kind of
expansion area, the estimated earnings window concerning generation of revenue and extent of
firm exposure is the issue (Cook, Hsu and Marqua 2014). In this case, Titan Travel could use
60% of its retained earnings, which would enhance the prospects of dealing with unforeseen
events in the new market.
Mix of retained earnings and equity financing:
This is a debt-free approach at the time the retained earnings of the organisation are not
adequate in funding the expansion project and leaving an adequate reserve against unforeseen
circumstances. Based on the amount of retained earnings, 40% could be viewed as appropriate
figure, if the cash in hand of Titan Travel is not sufficient in underwriting the expansion plan.
This would leave 60% in reserve, in which private placement develops the platform for ensuring
the leftover funding (Crotti and Misrahi 2015).

5FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
Equity finance approach:
This is the third alternative, in which Titan Travel could raise funds with the help of
equity financing using private placement. This would eradicate the requirement for interest
charges and debt; however, certain drawbacks are associated with this approach as well. The
first is the amount of estimated funds required in completing the project (Han and Yoon 2015).
As unforeseen circumstances are always an element of risk, which denotes that the organisation
would need to include a contingency of at least 20% in the private placement for having a
reserve. The issue is that Titan Travel needs to issue additional shares. However, as such shares
become tradable later, it has to take the risk that if estimations and target dates are missed, the
effect of shares hitting the market might have negative impact on the share price (Hernández-
Méndez, Muñoz-Leiva and Sánchez-Fernández 2015).
This denotes the influence of share dilution, which the market could not absorb at the
time the market fails to meet the estimated outcomes. Hence, this method depicts additional risk
on the part of Titan Travel, since it would bet its future stock performance compared to the
projected outcomes. The consequences might have negative influence on the institutional
investors and shareholders, if the opportunity of the organisation fails to meet the expectations.
Bank borrowings:
This type of source of funding is the least preferable of all the three methods. This is
because Titan Travel would be taking on debt. From the perspective of the analysts and
shareholders, it could signify that the organisation is not financially viable in terms of
preparation for the expansion plan, since it fails to accumulate the required capital internally
(Jenkins and Schröder 2013). There might be instances, in which an attractive deal presents itself

6FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
so that Titan Travel needs to act. This implies that borrowing might depict commitment level and
the downfall is the debt obtained for funding the deal. This would enforce on Titan Travel to the
point, in which unforeseen events could place the entire organisation in an adverse position.
Hence, based on the above discussion, it is recommended to Titan Travel to obtain
funding fully from retained earnings or through a mix of retained earnings and equity financing.
Explanation of the behaviour of costs and importance of cost-volume-profit (CVP) analysis
as a decision-making tool:
As commented by John and Susan (2015), cost behaviour depicts the way of change in
various types of production costs, when the level of production changes. Based on behaviour,
there are three major kinds of costs:
Fixed costs:
Fixed costs are costs that do not vary with any change in the level of activity. Titan
Travel would have to incur these costs, even if no production is carried out after its expansion in
Japan. For example, fixed costs in this expansion plan might be in the form of rent expense,
straight-lie depreciation expense. However, fixed cost per unit falls with rise in production. The
below-stated example describes the fact:
Particulars Amount (in $) Amount (in $) Amount (in $)
Rent expense 40,000 40,000 40,000
Depreciation expense 7,000 7,000 7,000
Total fixed cost 47,000 47,000 47,000
Number of bookings 2,000 4,000 6,000

7FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
Fixed cost per unit 23.5 11.75 7.83
Table 1: Total fixed cost and fixed cost per unit of Titan Travel at different activity level
(Source: As created by author)
Figure 1: Fixed cost and change in fixed cost per unit at different activity level
(Source: Jucan and Jucan 2013)
In case of Titan Travel, it is assumed that Titan Travel would be able to accept 6,000
bookings in its initial year of operation in Japan, in which the fixed cost per unit would be $7.83.
Variable costs:
The variable costs are those costs that vary directly with the level of production. This
implies that there would be rise in variable cost with increase in production and vice-versa
(Nawaz and Hassan 2016). The below-stated example describes the fact:
Particulars Amount (in $) Amount (in $) Amount (in $)

8FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
Direct labour 2,500 2,900 3,200
Salaries and wages 20,000 23,000 28,000
Supplies and travel 800 1,200 1,600
Sales commission 7,000 7,000 7,000
Total variable cost 30,300 34,100 39,800
Number of bookings 2,000 4,000 6,000
Variable cost per
unit
15.15 8.53 6.63
Table 2: Total variable cost and variable cost per unit of Titan Travel at different activity
level
(Source: As created by author)
Figure 2: Variable cost and change in variable cost per unit at different activity level
(Source: Prebensen, Chen and Uysal 2014)

9FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
In case of Titan Travel, it is assumed that Titan Travel would be able to accept 6,000
bookings in its initial year of operation in Japan, in which the variable cost per unit would be
$6.63.
Mixed costs:
Mixed costs are those costs, which possess the properties of both variable and fixed costs.
For instance, telephone expense and fuel expense are mixed costs, as telephone expense
comprises of a fixed component like line rent and fixed subscription charges along with variable
cost charged per minute cost. In case of Titan Travel, this cost type has not been taken into
consideration for the expansion plan.
Significance of CVP analysis:
Titan Travel could rely on CVP analysis, if the costs remain identical within a particular
level of production. This is because this analysis is a method of cost accounting, which is related
to the impact of varying levels in sales and costs associated with the operating profit of the
organisation (Robinson et al. 2016). It is assumed that Titan Travel would be able to make 6,000
bookings, while a further assumption is made that the costs could be fixed or variable in CVP
analysis.
In addition, with the help of CVP analysis, contribution margin is used for managing the
service contribution margin, which is the outcome obtained after deducting variable costs from
overall sales. In order to ensure the success of the expansion plan, Titan Travel is required to
ensure that the contribution margin is higher in contrast to the overall fixed costs. Along with
this, the organisation could use contribution margin for ascertaining the break-even point of
sales. The CVP analysis in the context of this specific expansion plan is discussed as follows:

10FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
Particulars Amount (in $)
Selling price per booking 28
Sales revenue 168,000
Less: Variable costs 39,800
Contribution margin 128,200
Contribution margin per
booking 21.37
Less: Fixed cost 47,000
Net income 81,200
Break-even (in bookings) 2,200
Break-even (in sales) 61,591.26
Table 3: CVP analysis for the proposed expansion plan
(Source: As created by author)
According to the above table, it could be stated that the minimum number of bookings
that Titan Travel would have to make after expanding its business operations in Japan is 2,200
for avoiding loss situation. As a result, the break-even sales of the organisation would be
$61,591.26, in which it would neither make any profit nor incur any loss.
Discussion and recommendation of appropriate pricing strategies:
The pricing strategies that are available to Titan Travel to expand its business operations
include the following:

11FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
Skimming:
This strategy takes place when an organisation sets a higher price for attracting the most
valuable customers of the market (Tan et al. 2017). This strategy would be successful for Titan
Travel, if it could design a unique package by anticipating demand to be relatively inelastic in
the Japanese market. In addition, the customers would not be sensitive to price, which would
increase the volume of sales of the organisation. However, this strategy is useful only when Titan
Travel does not have the ability to accumulate capital and resources for providing large service
volume.
Penetration pricing:
Penetration pricing involves an organisation setting a lower price and thus, the aim is to
attain the maximum market share possible (Xiang, Magnini and Fesenmaier 2015). Titan Travel
could adopt this pricing strategy, since demand is highly elastic and thus, setting lower prices
would increase the overall revenue base of the organisation. Moreover, the economies of scale
are large in the global market and plenty of competitors might enter the Japanese market. Hence,
it is advised to Titan Travel to adopt the penetration pricing strategy for assuring the success of
its expansion plan in Japan.
Conclusion:
Based on the above discussion, it could be evaluated that the most feasible sources of
finance for Titan Travel in order to expand its business operations in Japan include retained
earnings and a mix of retained earnings and equity. In addition, the various cost behaviours have
been described in the report, in which it has been found that for this specific expansion plan,
fixed costs and variable costs would be incurred, while the mixed costs would not be taken into

12FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
consideration. Finally, it is recommended to the organisation to adopt penetration-pricing
strategy in the Japanese market for increasing its revenue base to cope up with the existing and
upcoming competition.

13FINANCIAL DECISION-MAKING FOR TRAVEL AND TOURISM
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Cohen, S.A., 2016. Lifestyle mobilities: intersections of travel, leisure and migration. Routledge.
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USA: Pearson.
Crotti, R. and Misrahi, T., 2015. The travel & tourism competitiveness index 2015: T&T as a
resilient contribution to national development. The Travel & Tourism Competitiveness
Report, 2015, p.13.
Han, H. and Yoon, H., 2015. Customer retention in the eco-friendly hotel sector: examining the
diverse processes of post-purchase decision-making. Journal of Sustainable Tourism, 23(7),
pp.1095-1113.
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pp.1001-1021.
Jenkins, I. and Schröder, R. eds., 2013. Sustainability in tourism: A multidisciplinary approach.
Springer Science & Business Media.
John, S. and Susan, H., 2015. Business travel and tourism.