Delivery in day(s): 5
BTEC Higher National Diploma in Business
Unit Number and Title
Unit 2 Finance and Funding in TT Sector
Importance of cost and volume in financial management
Cost is the amount of expense incurred or to be incurred for a particular event or activity. Volume is the quantity which is used or procured by incurring such costs or the quantity proposed to be produced from such costs. With regards to the travel and tourism business, cost is the amount incurred for developing the tour packages or products or providing the travelling services and volume is the number of customers purchasing the tour products or number of passengers covered in tour package. Cost volume profit analysis requires use f various tools to identify the impact of cost and quantity and changes in these factors on the profits. These include marginal costing method, calculation of contribution, break-even analysis etc. The importance of cost and volume analysis is the determination of effect of changes in cost and volume on the profits and level of activity to assist the management in making the financial decisions for the business which relate to the investment of capital funds appropriately and achieving the objective of earning high returns (Trifan, 2011). In this way cost volume and profit analysis is used as an effective tool for managing the financial resources of travel and tourism business in a way that the is a service industry and thus it is very essential to manage the costs. Merlin Entertainments Plc. uses the cost volume and profit analysis to identify the contribution of each event proposed or conducted by the company. The contribution of each event helps in determining whether such events shall be conducted by the company in future or not. Also the break-even point for number of customers or bookings of the event is important for the company to identify the target sales for the event.
Pricing refers to as the method which is used to determine the amount for which a product or service is sold by a business to its customers. It relates to determining prices for each and every individual product or service considering various factors such as costs, volume, economies and diseconomies of scale, level of activities etc. In travel and tourism business pricing relates to the setting of amounts for the products and services for travel and tour packages either on individual basis or in the form of combined price for the package. Various pricing methods are used by different kinds of business strategy in the travel and tourism industry. The pricing method adopted by a business depends on the pricing strategy of the business framed in accordance with the analysis and evaluation of effect of market forces and market needs and requirements (Theurilat. Et al, 2010). The different types of pricing methods used by different businesses in travel and tourism sector are as follows:
Merlin Entertainments Plc. is indulged in the business of conducting events, providing facilities for access of theme parks, resorts, vacations and trips etc. Therefore, the profits of business of the company is affected by various direct and indirect factors such as seasonal variations, competition, pricing strategy, current trends in the travel and tourism business, market demand, micro and macro environment, etc. The travel and tourism sector is the kind of business which is greatly influenced by the seasonal variations creating a huge impact on the market demand for the products and services. Thus the seasonal variations result in fluctuating demands in context of number of bookings by customers for the resorts and theme parks. Apart from this, the current trends in travel and tourism industry in UK which relate to number of tourist arrivals in the country also affect the profit of Merlin Entertainment since this factor results in decrease in the number of customers for the business of company resulting in decline in market demand. The macro environmental factors such as regulatory policies, legislations, political environment, social and cultural impact etc. also affect the profits of the business of the company since they affect the policies of the company that relate to profit making and pricing of its products and services. In this way the profits of the company fluctuate due to various internal and external environmental factors of the business of the company (Medlik, 2012).
Interpretation of final accounts
The Restaurant Group Plc. (TRG) is the company based at United Kingdom indulged in the business of operating restaurants and pubs which are more than 500 under various different types of brands. The portfolio of the business operations of company comprise of table service, customer service, sandwich shops, pubs and bars. It has also a diversified business of concessions which is operated through airports of United Kingdom. This business environment provides catering solutions to clients through partnerships.
Profit Margin Ratio = Net profit/ Total Revenue
Profit margin Ratio for 2015 = 68,886/ 685,381 = 10.05%
Profit margin ratio for 2014 = 66,999/ 635,225 = 10.55%
Return on Equity = Net income / Total shareholders’ equity
ROE for 2015 = 68,886/ 283,560 = 24.29%
ROE for 2014 = 66,999/ 244,524 = 27.40%
Current Ratio = Current Assets/ Current liabilities
2015 = 38,005/ 136,403 = 0.2786
2014 = 29,410/ 121,634 = 0.2418
Acid Test Ratio = Current assets – Inventory – Prepaid expenses/ Current liabilities
2015 = 38,005 – 6,389 – 0 / 136,403 = 0.2318
2014 = 29,410 – 5,530 – 0 / 121,634 = 0.1963
Inventory Turnover Ratio = Cost of goods sold/ Average Inventory
2015 = 558,491/ 6,389 = 87.41
2014 = 521,325/ 5,530 = 94.27
Asset Turnover Ratio = Revenue/ Total Assets
2015 = 685,381/ 468,078 = 1.46
2014 = 635,225/ 424,419 = 1.5
Analysis of Financial Performance
From the analysis of the financial statements of the company, it can be observed that the financial performance of the company in terms of profitability and liquidity has declined. However the decline is not huge and the rate of profits of the company are still high which shows high profit potential of the company. The company is not in a sound liquidity or solvency position. The earnings per share and dividend per share of the company is high which means that the company is earning good returns for its shareholders and has high investment potential also. The company is recommended to reduce its dividend pay-out ratio and increase its retained earnings to improve its solvency or liquidity position (Huggett & Pownall, 2010).
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