UK College Finance and Funding in Travel and Tourism Report

This report delves into the financial aspects of the travel and tourism sector, focusing on Merlin Entertainments plc as a case study. It explores the significance of cost and volume in financial management, differentiating between direct, indirect, fixed, and variable costs. The report analyzes various pricing methods, including cost-led, cost-plus, break-even, marginal costing, and return on investment, using examples from businesses like Thomas Cook and British Airways. Furthermore, it examines factors impacting profitability, such as seasonal variations and economic conditions, and conducts ratio analysis to assess organizational performance. A capital project involving a new theme park is considered, with an emphasis on finance sources and distribution. The report also explains different types of management accounting information, such as data and information, and the importance of such information to support decision-making. The report concludes with an assessment of how management accounting information can serve as a decision-making tool by comparing trends, forecasting, and evaluating investment opportunities.

Finance And Funding In The Travel
And Tourism Sector
1

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 ................................................................................................................................................3
1.2.................................................................................................................................................6
1.3 ................................................................................................................................................8
TASK 2..........................................................................................................................................11
2.1...............................................................................................................................................11
2.2...............................................................................................................................................17
TASK 3..........................................................................................................................................21
3.1...............................................................................................................................................21
TASK 4..........................................................................................................................................24
4.1...............................................................................................................................................24
CONCLUSION..............................................................................................................................25
REFERENCES..............................................................................................................................27
2

INTRODUCTION
Finance and funding the most important department of organization which handle
different operations and activities related to management. It facilitates to access cost effective
sources of finance and focuses upon reducing cost of production of the business in the
marketplace. It proves to be effective for company to deliver good quality of services to large
number of buyers in affordable prices. Present report is based on case study of Merlin
Entertainments plc which is based on United Kingdom. This is operating its business in 115
attraction across 23 countries. The major business segments included in this organizations are;
LEGOLAND Parks, Midway attraction and Resort Theme Parks. Furthermore, importance of
cost and volume in financial management of travel and tourism sector has been explained. In
addition to this, pricing methods used in the same sector are analyzed by taking examples of
three different types of businesses. Moreover, factors affecting profitability of travel and tourism
sector has also been analyzed. Moreover, ratio analysis has been done in order to assess the
performance of cited organization and implement appropriate strategies for improvement of the
same. In addition to this, capital project as new theme park has also been taken and accordingly
sources of finance as well as distribution are selected. Apart from this, different types of
management accounting information are explained to represent the financial information related
to particular financial year.
TASK 1
1.1
Cost is very important element for setting price of products offered by corporation. This
help business to add margin on products and services to so as to enhance overall rate of return.
However, generally cost is considered as money used for production of goods and services. It
proves to be effective to cater need of personnel and ensure their well being (Acton, 2013). The
main purpose of cost is the assess the actual price of product and services in to ensure consistent
flow of production. The importance of cost and volume in financial management can be assessed
in the following manner- Direct cost-It is the cost which is incurred while producing effective tour packages. For
example, all the operation cost of production Merlin Entertainment will be considered
3

under direct cost. This cost is very important which general include direct labour,
material and other related aspect. However, fuel and gas and other inputs of product plays
important role in considering this cost (Allen and Economy, 2011). Though, direct cost is
considered in every business for assessing its direct impact on margin as well as
production. The occurrence of direct cost is based upon sales of tour packages and actual
cost incurred to render services. According to the case study Merlin entertainment occur
different kind of cost such as fuel for bus, wages for bus tour and room cleaning, national
park permits as well as meals whilst on tour. Apart from this, direct labour and material
involved in rendered services are considered as direct cost of Merlin entertainment. Indirect cost-It is another type of cost which includes indirect material, labour etc.
However, other cost related to stationary and office suppliers as well as overheads are
included by management of Merlin entertainment to ascertain price of services rendered.
At the same time, other factors such as energy cost, fuel charges and cleaning as well as
repair cost are also considered by cited corporation. Here, indirect cost for Merlin
Entertainment will be considered for setting actual price of product and accordingly take
decision related to selecting of effective strategy for enhancing sales turnover (Cesarotti,
Silvio and Introna, 2009).
 Fixed cost-This cost remain fixed for Merlin entertainment and does not vary as per the
increase and decrease in number of total tourists (Elmassri and Harris, 2011). Here,
lighting, rent and rates come under fixed cost which generally remain constant. This also
consists of other kind of method under which some of part of cost remain fixed and some
remain variable. According to the given case study, Merlin entertainment occur different
kind of fixed cost such as accounting and legal fee, depreciation, insurance and other
business as well as premises cost. On the other hand, salaries and rent are also included
in the same. However, some of the aspects tend to varies after reaching at certain
proportion. For example, fixed amount of electricity's bills is paid whether it is use or not.
In this manner, fixed cost remain same for the business in case Merlin entertainment
serve one customer or 100 at a time. This cost is usually added while calculating cost of
services because it does not vary in accordance with number of tourists or tour packages.
4

5
2011 2012 2013 2014 2015
0
5
10
15
20
25
30
35
40
Central cost
Illustration 1: Central cost

 Variable cost-It is well know fact that some of the expenditure keep on increasing with
number of customers or tourists (Grieve, 2013). Owing to this, company need to take care
of cost incurred in each segment and accordingly decision related to the same can be
taken. This type of cost consists of different aspects such as wages and salaries of staff
who are driving or doing work related to cleaning. Apart from this, cost of food and
beverages as well as telephone charges are also involved. Therefore, variable cost varies
in accordance with changes in volume of sales. Thus, it is considered as indirect cost
which tend to increase price of services paid by tourists.
6
2011 2012 2013 2014 2015
0
20
40
60
80
100
120
140
Net finance cost
Illustration 2: Net finance cost

According to the above mentioned graph, cost of sales is 193 m pound whereas rent of
the corporation was 596. In the same manner, rent was 87. This is showing that cost of is
appropriate with respective to profitability. It is because profitability is 1278 whereas cost of
sales was just 193. In this manner, corporation can easily generate greater rate of return.
7

Volume in financial management
Volume in financial management is another important aspect which is considered by
management in order to determine the actual situation of business in the marketplace. Here,
company can get information related to volume by finding break-even point. This break even
point is calculated with the help of cost benefit analysis.
(Source:Break-Even Analysis and Forecasting, 2015)
Under this company identify what is the total cost and what is the total profit generated
by the same (Kierulff and Petersen, 2009). Owing to this, company need to ensure
compliance of all related work and accordingly all related objectives can be achieved in
particular time. It reflects that business can be conducted in an effectual manner with
assessment of potential profit derived from several tourist activities of Merlin Entertainment.
For example, above mentioned diagram is showing that profit and cost and income of
8
Illustration 3: Break-even point

company matches at certain point which tend to serves as the break even. It would be
affected with the volume of sales turnover and accordingly profitability will be enhanced.
Apart from this, economies of scale reflects that company performs in well manner and
cost of offering tourist services is reducing to a great extent. On the the contrary, business
need to ensure that cost of services /tour packages goes down and output enhances in order to
meet the purpose of business and create competitive edge of the business. In this manner,
Merlin Entertainment adopt effective strategies and aspect in order to ensure effective
management.
Apart from this, focus is laid upon situation of no profit and no loss so that accordingly
appropriate strategies can be adopted (Ledgerwood and White, 2006). This proves to be
effective to create competitive edge of the business because here firm start implement
different strategies to increase sales turnover,. However, little modification is made under
pricing strategies and creating psychological effect among buyers. It would be effective for
business to assess the impact of volume of production on different activities like cost and
profitability. Owing to this, contribution is calculated through which management of business
assess detail information related to cost and profit generated through particular aspect (Nga
and Yien, 2013). Under this, some of the assumption are considered by the business wherein
focus is laid upon constant selling price of services and relationship of cost is perfectly
known.
1.2
There are different types of pricing methods adopted by the business in order to recover
cost of production and deliver good quality of services to large number of buyers. The selection
of appropriate pricing strategies is based upon requirement or nature of business. Owing to this,
all businesses put effort to select the right price strategy and then take decision related to the
same. These pricing strategies are explained as follows- Cost-led method-Cost led pricing is the most effective aspect during past era for
calculating price of tourist services. Under this, main emphasis is laid on cost incurred in
production and services in order to manage overall rate of return in the business (Pavlatos
and Paggios, 2009). It is considered as very popular within travel and tourism sector as it
very easy to understand and apply. In this manner, it is effect for corporation to set price
9

of product and services because relatively less time is taken to accumulate data and
calculate cost of Merlin Entertainment to determine sales price of its product. Cost plus pricing method -This is the most effective aspect to cover the production under
which corporate like Thomas cook set price of services by focusing upon total cost and
margin upon the same. For example, 30% margin is set on services in order to determine
success of the business and cater need of the same by adopting effective strategies. It
facilitates companies to increase sales turnover (Tauringana and Afrifa, 2013). However,
some time Thomas Cook applies different alternatives to create psychological effect
among user. In this regard, customers are provided discount during off season and sales is
generated by influencing their purchase decision. Furthermore, Merlin Entertainment also
uses such kind of pricing method through which margin of profit is enhanced in
accordance with demand of products and services. For example, in case demand of
services higher then company can easily increase the ratio of profitability. Break-even pricing- It is another kind of price method which is generally adopted by
different firms like Merlin Entertainment, Thomas cook and British Airways. The reason
behind the same is no profit and no loss situation under which company come to know
that how much amount of profit is needed to ensure growth of business. In this regard,
British Airways can use such kind of strategy for the purpose of increase customer base
by offering them good quality of services in a affordable price (Airey and et.al., 2015).
The main reason behind applying such kind of method is sell the assets or services on the
basis of cost incur to render the same. On the other hand, break pricing is most effective
under which companies can change their pricing strategies by observing the one of
competitors. It proves to be effective to create good image of the Merlin Entertainment
because cost can be recovered easily and customers are retained for longer time span.
Owing to this, all business try to adopt such kind of pricing method under which it
becomes easy to enhance price of services and services at any point of time. Marginal costing method-Marginal costing reflects cost of every additional units. Such
kind of pricing method seems to be a bit complex where businesses may face issue in
extracting higher amount of profitability (Eagles, 2014). Owing to this, it becomes easy
for corporation apply other methods which aids to determine right price strategy and
10

determine higher rate of return from the fund. Moreover, British Airways might select
such kind of strategy at certain point of time through which overall operating cost will be
recovered and return will be generated.
 Return on investment method -This is another type of method under which company
decide about the effective price. However, decision related to price is taken on the basis
of return on investment. This facilitates corporation to meet expectations of all related
stakeholders such as employees, shareholders, competitors and others. In this regard,
business need to set the cost of product and percentage of return will be calculated so as
to add the margin in the similar manner (Jaafar and et.al., 2011). Return on investment
type of method proves to be effective to cater need of personnel and accomplish their
purpose in an effectual manner. It can be critically evaluated that personnel working in
the respective department should be aware of right manner to calculate the cost. It aids to
enhance overall rate of return and set right price of tourism packages or services.
1.3
Profit is the amount of incurred by firm other cost of products and services. Generally,
ratio of profitability is based upon selection of pricing strategy so that accordingly business can
apply the same. These different factors are explained as follows- Seasonal variation-The profitability of travel and tourism business like Merlin
Entertainment changes as per the seasonal variation (Li, Blake and Cooper, 2010). This is
because during off season company believes to promote sales by offering discount to
customers. It has direct impact on sales turnover and accordingly profitability is get
affected. The following detail reflects that sales volume of business affect in accordance
with season. Here, Merlin Entertainments might face issue during the season of
December and Jan due to winter. In this particular season some buyers may not prefer to
go for visit. However, in other season visitors will be higher and accordingly corporation
will get good rate of return. It indicates that during off-season, Merlin Entertainment will
change its pricing method such as introduction of discount and special offer. It would be
effective to attract more buyers during off-season also. In addition to this, during the
summer season of 2015 sales turnover of business increased by 2.3% which reflected that
strong performance of company in Midway Asia in Midway, mainland China.
11

Furthermore, during June 2014 visitation was declined to a great extent. On the other
hand, May month also suffered loss of profit worth 16.5% due to higher variable cost
(Financial Reports, 2017).
The aforementioned graph is showing that variation in its rate of return because during
wk1-18 it was 24% which was reduced in the next wk 19-26 by 17% Therefore, revenue for H1
is 41% in H2 it was 59%. It shows that seasonal variation is there in Merlin Entertainment. Social environment-This is another important factor which must be considered by
business. Under this, changing preferences of buyers can be taken into account for the
purpose of meeting expectation of large number of customers (Pocock and Phua, 2011).
However, company need to change its existing strategies and expenses are incurred over
marketing activities. It would be appropriate for meeting expectation of large number of
buyers. For example, individual or couple would like to prefer other destinations whereas
families focuses upon upon other kind of destinations such as cultural and heritage
12