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Unit 2 Finance and Funding in Travel and Tourism Solution Assignment
Travel and tourism sector is growing at a rapid pace and the industries available in this sector are highly benefited with it. Merlin Entertainment Plc and TRG PLC are one of them that perform adequate level of services to their respective customers. There are various costs get incurred by them in order to prepare their respective products. Their functionality and profit earning capacity get impacted with the effect of the different factors. These factors get discussed in the below report. Presentation is prepared in order to share adequate level of information related to the management accounting information and financial analysis will be made over the performance of the TRG plc.
1.1 Explain the importance of costs and volume in financial management of travel and tourism businesses using Merlin Entertainments Plc as your case study
Importance of cost and volume in financial management of travel and tourism business
Case study- Merlin entertainments plc
Cost and volume analysis is a technique for studying the relationship between cost and volume or turnover of business. In our case cost of a service sector majorly tour and travel services cost may include variable cost of flights, hotels booking cost and other costs. Cost and volume analysis in the financial management helps in profit planning of the business enterprise. There are various techniques or tools of the cost volume analysis which helps the Merlin entertainment Plc to determine profitability and cost analysis (Lomborg, 2010). Major tool utilised for the above analysis are
- Breakeven analysis
- Contribution margin analysis
The importance or relevance of taking cost & volume analysis are as follows
- Helping in getting and analysing profitability of the business which is bread and butter for any firm
- Helps in doing comparative analysis and efficiencies of tour and travel business in the near future
- Helps in forecasting for making future plans accordingly
- Helps in taking managerial decision and effect of change in level of fixed and variable cost at various level of business operations
- Helps in controlling cost (Lomborg, 2010).
Cost volume analysis in tour and travelling example
Let us take example of 50 clients who booked the tour package from the Merlin Entertainment Plc, we charged a particular package from different clients according their requirements and place of travel, package covering both fixed and variable cost, now if we earned average $ 400 from each client and we have total fixed cost for the respective month is $ 3000/month now through this we can calculate breakeven point. Breakeven point is the point where Merlin entertainments plc don’t suffer any loss or profit. The main task of the company is to justify the breakeven point first and work on its cost volume profitability analysis accordingly. This helps the organisation to at least stabilise its going concern (Horngren, et. al., 2014).
1.2 Analyse pricing methods used in the travel and tourism sector using Merlin Entertainments Plc as your case study
Price is the value high is basic for any industry and it is crucial for a travel and tourism industry like Merlin plc. Generally there are many competitive players in the tourism market and therefore particularly in this market Merlin Entertainment plc has to be very cautious while choosing the pricing methods. Small change or variations in prices in tour packages will shift customers to other competitors. For example Merlin Entertainment plc may offer a package of $ 10000 which might be offered by another business rival at $9900. This might affect our existing customer base too. Another point is that price charged from the customer must match the utility benefits provided to him i.e. it must match the product or service offered to him. The price of the tourism industry depends on the objective of the firm and the particular time and season at which the Merlin Entertainment plc is going to set the price for. Sometimes survival in the committee market is the major objective before setting out prices of the firm. The second foremost objective before setting up the prices is the cost paid by the Merlin Entertainment plc for the product and services offered by the firm to its customers. Cost is further segrated into variable and fixed cost and generally firm does not go below its variable cost before setting up its prices. At any point of time firm Merlin Entertainment plc will not offer services at price below its variable cost. In case of high competition and in non seasonal market firm may offer the product below its total cost which include both fixed and variable? I.e. fixed cost can be ignored for some time but not variable cost. There are various methods used by travel and tourism sector more particularly Merlin plc is as follows (Horngren, et. al., 2014).
Cost plus pricing: This is important tool of pricing used in tour and travel industry particularly Merlin Entertainment plc as it is commonly seen in such type of industry that prices changes on the various factors like frequent change in flight prices, change in currency exchange rate so it is difficult in such type of industry to pre fix the package for the customer at very early stage of time. Generally such organisation add on the margin on the total cost incurred by them
Break even pricing: Such type of industry first focus on the recovery of total cost incurred which include both fixed and variable cost. That is why for this purpose company offers packages at lower cost by giving discounts, promos etc. This to cover the cost part of the company then later on focus on attaining profits (Horngren, et. al., 2014).
Going rate pricing : To stay in the market and to cope up with the rival competitors organisation sometime offer the same prices which is offered by the competitors to at least keep hold of its existing loyal customers. This is some time below out maintainable cost too (Kinney & Raiborn, 2013).
Target return pricing: In such type of pricing company set out the target profits and sales price is generally according to market made. Now the organisation like Merlin Entertainment plc has to work out effectively and efficiently to settle down in target cost (Kinney & Raiborn, 2013).
1.3 Analyse factors influencing profit for travel and tourism businesses Merlin Entertainments Plc as your case study
Factors effecting profit for travel and tourism business
There are many factors both from internal and external environment of the business of travel and tourism which affect the profitability of the organisation. Some of the major reasons that affect the profitability of business (Drury, 2012). These are as follows
Change in government regulation: - Change in rules and regulation of the business and in international tour packages the company has to consider the Law of the land of the respective place where the package is related with.
Change or fluctuation in currency exchange rate: - There is huge loss to the company Merlin Entertainment plc when package for international package is booked at an old currency rate and domestic currency suffers a decline in respect of the foreign currency. Generally company hedges its risk portfolio to its maximum part but still such organisation is vulnerable to currency fluctuation risk (Drury, 2012).
Huge competition: - The tour and travel market’s profit is vulnerable to regular new entrants in the external market which follows the penetration pricing policy. It affects the exiting players in terms of profitability as it is difficult to match the lower prices of new entrants every time.
Environmental and seasonal factors: - The tour and travel business total depends on the environmental conditions and it’s a seasonal business. If there is any disaster or any crisis in the area of our major scope of work then it affects the profitability of business adversely (Drury, 2012).
3.1 Interpret financial accounts of The Restaurant Group Plc for the year ended 28 December 2014 showing at least two years performance (comparing 2014 to 2013).
The Restaurant group PLC also referred as TRG PLC was founded in late 1980’s with its headquarters in London, United Kingdom. The company’s original name at the time of foundation was City centre restaurant plc. In the year 2000 the restaurant name was changed to its existing name The Restaurant group PLC. Primarily company was formed to operate and manage Garfunkel’s chain of restaurants. Later on it acquired Mexican chain of restaurants and renamed those as Chiquito. After some time of its operation in the mid 1990’s company opened Frankie & Benny’s. At present company The Restaurant group PLC has around 350 restaurants at different locations operating under the name of various brands formed and acquired by company time to time. The company has also its scope or territory of work expanded in the pub restaurants and outlets in UK airports (Soyode & Bande, 2016).
While analysing the Consolidated Financial Statements of TRG plc we have analysed the following financial performance on the basis of resultant outcomes of two years:-
Long term funds
Gross profit margin
Operating profit margin
PAT or LAT/revenue
Return on capital
Gross profit/capital employed
PBT or LBT/revenue
PAT or LAT/revenue
Current assets/current liabilities
gross profit ratio
Gross profit / Net sales
operating profit ratio
operating profit / Net sales
fixed asset turnover ratios
Net sales / Total fixed Asset
Working capital turnover ratios
Net sales / working capital
We have analysed the following above ratios. These include testing the company performance on the basis of various outcomes.
These ratios are broadly classifies in various categories, then sub classified on the basis of particular criteria
The major classifications are
Liquidity ratios: - It is ability of the company The Restaurant group PLC that to meet its current debts with the current assets, these can be floating or circulating assets also. The main objective of current assets is that it can be realisable into cash within short span of time maximum 1 year (Codreanu, et. al., 2012).
This includes current ratio and liquid ratio. Formulae of Current ratio = current assets/ current liabilities
In our case of The Restaurant group PLC current ratio for the year 2014 & 2015 is 1.07 and 1.05. This shows that our current ratio has been slightly decreased that means our repaying capacity or safety umbrella for current liability has been decreased over a span of 1 year very slightly
Ideal ratio taken in the tour and travel industry is 1.5: 1 for current asset ratio. The company far much behind the ideal ratio and due to this there might be not sufficient funds to repay the current debts and business is running far ahead of its normal level of activity.
Solvency or leverage ratios: - As there is no external long term debt funds in the organisation this shows that company is running totally on equity funds. This means there is a good margin of safety for short term creditors. But due to this cost of attaining the funds is higher as it is lower in case of debt funds and the ownership is diluted which might hamper the decision making
Activity ratios: - The funds attained from various long term and short term sources are invested in various portfolios of The Restaurant group PLC which helps the organisation to grab more revenue and earn profits. It is to effectively and efficiently utilise the resources of the business. The mentioned ratio helps to analyse the resource utilisation of the firm on the basis of turnover i.e. we analyse all the possible outcomes keeping sales/turnover as base. Therefore these assets are also called turnover ratios (Malíková & Brabec, 2012).
Few of the activity ratios calculated above are
Fixed asset turnover ratio: - It creates or defines the relation between fixed asset and net turnover. The main motto of The Restaurant group PLC is to know whether the fixed asset are effectively and efficiently utilised or not. In our case fixed asset turnover ratio for the year 2015 & 2014 are 4.77 & 4.51. This show the ability of the organisation to generate turnover per euro of investment in fixed asset. There has been upward trend noticed in the fixed asset turnover ratio. This shows the company is more effectively and efficiently utilising the long term resources or fixed capital.
Working capital turnover ratio: - It creates or defines the relation between working capital and net turnover. The main motto of organisation is to know whether per Euro of working capital are effectively and efficiently utilised or not with comparison to net turnover (Malíková & Brabec, 2012).
In our case working capital turnover ratio for the year 2015 & 2014 are 46.9 & 36.99... There has been upward trend noticed in the working capital turnover ratio. This shows the company is more effectively and efficiently utilising the net current resources.
Gross profit ratio: - In our case of The Restaurant group PLC gross profit ratio for the year 2014 & 2015 is 0.185 and 0.179. There has been increase in profitability of business (Faello, 2015).
For the company The Restaurant group PLC we have analysed the financial data of two years 2015 & 2014 respectively. From the above analysis and data collected from the annual report of The Restaurant group PLC we came to conclusion that
- There has been increase in the revenue by 7.9%
- Operation profit of the company has been increased by 10.5%
- There has been increase in earnings per share by 12.8% and dividend payout has been increased by 13%
In the end it is concluded that there are different costs are incurred in order to prepare the product. With the help of the adequate methods their effectiveness get evaluated in adequate manner. There are various methods available in order to set the prices from which adequate one get utilised by the Merlin Entertainment plc. The profit earning capacity get influenced by different factors. Management make use of the management accounting information as a decision making tool because it provide different set of information related to decision making. The ratio analysis is made over the performance of the TRG plc it shows that
Codreanu, D.E., Parpandel, D., Popa, I. & Tenovici, C.O. 2012, "FINANCIAL-ACCOUNTING INFORMATION SYSTEMS – RATIO BETWEEN ACCOUNTING ORGANISATION SYSTEM AND INFORMATIC APPROACH", Anale. Seria ?tiin?e Economice. Timi?oara, vol. 18, no. XVIII, pp. 580-584.
Drury, C. 2012, Management and cost accounting, 8th edn, Cengage Learning, Andover.
Faello, J. 2015, "Understanding the limitations of financial ratios", Academy of Accounting and Financial Studies Journal, vol. 19, no. 3, pp. 75.F
Kinney, M.R. & Raiborn, C.A. 2013, Cost accounting: foundations and evolutions, 9th edn, South-Western, Cengage Learning, Mason, OH.
Lomborg, B. 2010, Smart solutions to climate change: comparing costs and benefits,Cambridge University Press, Cambridge.