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Unlike manufacturing and companies trading in products, ascertaining cost driver and the basis of revenue to be charged from customers served in service sector involves in depth analysis of various costs incurred by the company in providing such services, bifurcating them into fixed and variable in order to conduct break even analysis. As a matter of worldwide practice, companies these days undertake cost-volume profit analysis into their evaluation and set prices for their product and service offerings (Chea, 2011). In this report analysis have been made that depicts how issues regarding appropriate costing and pricing strategies is addressed by the renowned company, TUI Travel Plc operating in travel and tourism industry in UK. This report also includes discussions held on significance of Cost Volume Profit analysis with context to TUI Travel Plc. Various management accounting information tools and sources of finance for funding expansion projects is briefed all together.
TUI Travel Plc is one of the world’ leading international leisure travel groups, listed in London Stock Exchange, operating in approximately 180 countries worldwide organized and managed through three principal business sectors involving Mainstream, Specialist and Accommodation & Destinations.
Explaining the importance of costs and volume in financial management of travel and tourism businesses
Cost can be termed as as wide range of business expenditure made by a particular organization for managing of wide several business practices for meeting demand of consumers. For achieving different types of business objectives, management should have to keep proper balance among many expenditure occurred in various business (Kesicki and Ekins, 2012). It includes direct cost, fixed cost, variable cost and indirect cost along with various overheads. For evaluation of several types of spending as well as assessment of prices of services, management of TUI Travel Plc has to measure cost of several services provided by firm.
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In this regards, CVP analysis has been evolved to determine relationship between cost and its related volume of sales. It is mainly concerned with how operating profit is affected by changes in variable costs, fixed costs and sale price per unit and the sales mix of two or more different products. CVP analysis when depicted through graphical representation determines the point at which total costs and total revenue meets, which is nothing but break-even point. However CVP analysis has certain inherent limitations in view of that it is a short run marginal analysis which assumes that the unit variable costs and unit revenues are constant. But in long run all costs are considered to be variable.
Hence for long run evaluation, one uses activity based costing or throughput accounting. With the help of this tool, the managers of TUI Travel Plc can acquire most reliable information and accurate information about cost of a range of business activities. This information provides assistance to manager in order to take different kinds of important decisions based on volume of sales as well as revenue form many business operations for assessment of planned profit within particular period (Fridson and Alvarez, 2011). This process helps manager for getting of desire profit by avoiding any type of future losses that can evaluated in terms of fixed costs and other financial loss. It also reflects profitability of investment. With the help of CVP analysis, the administration of TUI Travel Plc can examine the impacts of modification in cost and volume of services on operating and net financial gain of the organization. Another important concept in CVP analysis is that it evaluates the contribution margin as well as its ratio. Contribution margin indicates the worth of profit or income yield by travel organization before deducting fixed expenditures.
There are wide range of pricing methodsavailable that could be adopted by TUI Travel Plc for determining the prices of different type services in travel and tourism sector. Some most important pricing methods are mentioned below below:
Profit margin can be termed as income of company which is greatly influenced by total sales and cost of firm. Some most important factors are disclosed below that influence profit of TUI Travel Plc –
Managerial accounting information provides business leaders with data driven inputs which can improve decision making for maintaining going concern of the company. Business leaders using management accounting information decide on how to move the business forward, how to choose between in making or buying decisions. Forward planning, projections and monitoring actual performance cannot be done unless management accounting information is available (Choo and Tan, 2011). So far, various management accounting information tools and mechanisms have been developed for evaluating accounting data to lead informative results based on which strategic decisions can be taken. Tools include conducting ratio analysis, working out variances, preparing forecasts and budgets. In short it can be said that Management Accounting Information (MAI) helps the decision maker to formulate two kinds of decisions such as Strategic decisions and operational decisions
Financial statements of the business concerns reflect financial position and operational performance of the company’s business activities (Robb and Robinson, 2012). However as a measure of more detailed analysis, various stakeholders analyze financial statements of the business concern in which they place keen interest through conducting a financial ratio analysis test which produce more informative results then a mere tabulated financial statements could not.
Interpretation: Referring to the above tabulated ratios, it can be concluded that company does not possess adequate liquidity position or does not manage its working capital requirements efficiently. Justification of such conclusion drawn is evident from observing current and quick ratio of the concern. Company’s current assets are not sufficient in meeting current liabilities as they comprise almost half of the current liabilities figures. Thus, it can be said that to some extent current liabilities are honored and settled by long term funds. As far as operational performance is concerned depicted through profitability ratios, it can be said that though company generates reasonable gross profit margin from its business activity yet it loses substantial part of margin generated in recovering company’s administrative and other indirect costs leaving it to 1.28%.
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As far as efficiency ratios are concerned, company has been made optimum deployment of fixed assets in generating revenue from operations. Company’s average inventory has been sold 229 times during the year. Company’s PE ratio being 243 in number indicates that company is not generating sufficient earnings to pay back prices paid by investors. The higher is the PE ratio, the higher period company will need to payback their investment. Though company’s half debt is almost secured by equity holder’s fund, but company has sufficient funds on account of serving cost of debt justification of which is reflected in interest coverage ratio which is approx 16.63 times.
Sources of business vary with the type of business concern chosen for pursuing business activities. Business concern may evolve in form of conducting business as sole proprietor, forming partnership firms or incorporating companies’ whether public or private (Broadbent, 2003). In this task, sources of finance available to TUI Travel Plc, being incorporated as public company, will be discussed. As far as funding options for public companies are concerned, such companies can aid their business projects with generally two types of sources, one being financing through equity or owner’s fund and another being incorporating debt finance into the company’s capital structure. Sources of finance have been briefed below.
Based on above discussions held and interpretations made, it can be concluded that unless a proper method of costing is laid, pricing strategy in service sector specifically in context to travel and tourism leisure cannot be successfully made. As TUI travel Plc operates in various segments, it is important on part of them to choose an optimum package product mix which can be done through established mechanism of CVP analysis. Further, issues regarding raising appropriate sources of finance were being addressed listing the individual pros and cons associated with such finances.
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