UNIT 1 Finance and Funding in the Travel and Tourism Sector Level 5

Break-even point= Fixed cost/Contribution per unit

=£60000/£600

=100 tourists

From the above mentioned analysis which states that an entity will incur no loss or profit when 100 tourist will take all the tour packages offered by this entity (Carroll and Smith, 2016). The above results show that the total cost incurred by the business will get equal with its revenue when 100 tourists will take their services in terms of tour packages.

Importance of CVP analysis

• This analysis is an integral part of the overall business as it plays a significant role in managing the existing financial resources in order to predict its future expenses.
• The uncertain factors such as cost of visas and the changes takes places in the development of ticket prices is essential in order to administer the existing financial resources utilized by an entity in their business.
• This is regarded as important tool in making decisions in order to help all its manager in improving its efficiency.
• It helps in forming adequate relationships among different variables such as cost of sales and expenses which play major role in increasing or decreasing the profit of the business entity.
• The segregation of the cost into various categories such as fixed and variable cost which play important role in an entity.

1.2

Pricing is another important tool used by an entity in order to please their customers as this factor changes the overall attitude of an individual before purchasing anything especially tour packages (McLean, 2014). The quality and the prices of the tour packages will influence the decisions of the buyers. A travel operator need to develop their prices which reflects its internal capabilities in order to lure the variety of external customers. There are various pricing methods used by CHTC in attracting customers by setting the cost of trip to cater the needs of different individuals which are given as below:

Cost plus pricing- The profit is the primary aim of an enterprise which needs to be incorporate while designing its packages. The specific markup cost will be included in the pricing of tour packages developed along with all kinds of cost incurred by the business. The different cost incurred in this business includes accommodation costs, rent of premises, utilities bill, licensing and franchisee cost, marketing and sales, commission.

Break-even pricing- The pricing developed by this entity will as per the break even point determined at which the firm will no profit or loss as the sales done by an entity will meet its cost. This kind of pricing will be adopted by this organization whose major focus is on meeting all of its cost takes place in their business which created burden on an entity. The travel operator will choose this approach in order to meet all kinds of cost takes place in their business.

Break-even event point = Fixed cost/Contribution per unit

Market led pricing- The travel and tourism sector is one of the part of overall hospitality industry which guides its several branches (Katsinas, 2015). The business need to develop its prices according to the needs and the expectations of the customer lies in the outside business entity. The priced average decided by the overall industry needs to be accept by the organization who run under the assistance of the overall industry. The external market trends and buying patterns of all individuals need to be considered.

Target return pricing-The primary aim of an entity owner to earn specific return over the period which enhances the existing goals and the objectives of an enterprise. This pricing method will be based on future target return achieved by an entity in near future. The existing capabilities of an organization in terms of using its existing financial resources in order take risk of setting higher prices.

Target return price = Total costs + (Desired Profit %)/Total sales in units

1.3

It has been observed from the above break-even analysis applied on the results obtained by an entity in order to develop their prices to attract wide number of customers (Benson and Marks, 2016). The current number of tourist count to whom all kinds of tour packages offered to the variety of customers. The current level of customer base of an entity will not generate high amount of profit for the business as this will result into the loss of 6000 at this particular level.  The current level of units will be able to generate loss as the existing units of the sale in terms of the number of tourist are low as compared with the break-even point. The BEP unit is 100 and the current level of tourists is low which will result into the amount of loss of 6000.

The CHCT travel and tour operator wants to earn desired profit of 10000 in order to attract wide number of customers by offering variety of services in terms of unique design and additional services of the tour packages (McLean, 2014). The uniqueness in the tour packages will be maintained by keeping low prices and the high quality of products or services offered to the variety of customers. The company wants to earn the desired profit of 10000 which helps an entity in order to determine the number of tourist count. This number of tourists will increase the existing profit of an entity. From the above analysis it has been observed that the business need to serve to 117 number of customers approximately in order to earn this desired target return over the years.

Factors influencing profit in travel and tourism sector

Competition- The existing competitors in the external market will affect the decision of an entity in order to develop their pricing. The biggest competitors in the travel and tourism sectors are TUI Travel and Cox&Kings who increases or decreases the level of competition. The additional services such as complimentary accommodation services and others like offers and discounts (Katsinas, 2015). These offers will change the behavior of an individual towards the business entity by booking travel related services. This factor will affect an enterprise in terms of overall market captured by one entity which in turn affected another business.

Legislation- A travel operator need to follow all the rules and the regulations in order to maintain their existence in the existing market. The travel operator need to fulfill external legal environment requirements by complying with all kinds of requirements. These laws are related with health and safety of an individual during the whole journey, licensing requirements, franchising and royalty agreements.

Marketing- The important aspects used by an enterprise in order to reflect their internal capabilities of the business entity. The marketing can be done by using the best suitable approaches by offering additional discounts. The development of the website of the company is essential as it will gather all kinds of the online as well as manual traffic of audiences. The advertising can be conducted by presenting the existing business resources. The advertising can be more attractive and pleasing in order to gain higher customer satisfaction (Canuto, 2014). The approach used by an entity is very indifferent to change the attitude of all kinds of person by offering variety of services. The adverting will be done through various modes such as television, newspapers and billboards. These forms of advertising will appeal all the users to purchase the products at lower prices as their primary motive is to gain higher  interest among the customers.

Demand- The market demand generated in the existing market will be helpful for an entity in order to gain higher market share. The demand of all the customers will get changed with the existence of the wide number of competitors who are offering variety of products in affordable pricing. The demand needs to be maintained in the existing market in order to gain the high level of customer satisfaction.

Price discrimination- The discrimination in the prices will be formed among the existing business entity which will further created external pressure on the business (Sweetland,  2014). This kind of discrimination will be done which helps an entity in order to gain higher base of customers held with their entity in order to rule the existing business enterprise. This form of differentiation in the pricing will be done on different factors selected by an enterprise.

Uncertain expenses- The different kinds of expenses will be incurred in the business entity in near future that affects an entity's business performance (Baker, 2016). The expenses such as visa cost, changes in the ticketing cost, accommodation rates set by the hotels, changes in the itenary supplied to all the user with the external changes. The changes created in the advance booking tour packaged by the variety of customers which spoils the brand image of an entity and lose their existing and all other potential customers held with an entity. The business relationships need to be formed in order to maintain the relationships with the customers for long time.

TASK 2

2.1

Presented scenario stated that CHTC’s managers are concern about their decision-making procedure and wants to bring necessary improvements in the same by incorporating various updated and modern decision-making practices and techniques. In order to improve decision-making process, there are several best tools and methods available that are enumerated underneath:

Budgeting framework: This decision-making tool can be utilized by CHTC’s CFO to make projection about the outcome of potential activities and day-to-day functions. It is considered as the best technique that works as a warning indicator and aware manager about the upcoming threats and challenges (Ladd and Goertz, 2014). The key benefit of is it helps to determine net results by knowing the surplus of total revenues over total expenditures. By applying this tool, CHTC’s financial manager can create a spending plan for their money and allow firm to make a enough fund by balancing both the revenues and spending. Owing to this, different kind of budgets like production, labor, material purchase, cash, marketing and others can be constructed to present an idea about the results of ordinary course of actions.

Variance analysis: It is a managerial tool that is often used as a budgetary control tool. This is because; it evaluates CHTC’s original performance by computing variances with the planned or targeted goals (Sweetland, 2014). It may be of two types that are favorable as well as unfavorable variances. Former depicts that actual revenues are higher and expenditures are comparatively lower than targeted, however, latter indicates poor performance just because of lower inflow and excessive spending as compare to the anticipated goals. Effective comparative analysis of target with the actual outcome provides huge assistance to the CHTC to determine the reasons for failure. As a result, better policies, strategies and remedial decisions can be taken to get the desired results or output in the future period.

2.2

Many-times, travel and tourism companies like CHTC and others have to make long-term investment like buying new technology, machinery, building and other fixed assets. All the investment proposal requires huge money to be invest in the project, therefore, it seems very essential and important for the business to determine the most suitable or appropriate alternative, that leads to bring success to the firm.

Capital budgeting, also termed as investment appraisal techniques provides CHTC extreme help to assess strength as well as weakness associated with the different project in order to determine the most trustworthy or higher yielding project (McLean, 2014). It is categorized into two parts, that are discounted and non-discounted techniques, discussed as under:

Payback period: This tool is extremely used in situation, where liquidity gains major concern or preferences by the investor due to lack of money. It is a very straightforward tool that identify that what time a project will require in recovering its initial investment quicker by generating higher cash flows specially in the beginning project life.

Accounting rate of return: As name implies, ARR simply estimate project’s future return on their initial cash outlay, also called initial investment. It is an accounting technique that makes use of accounting profit reported under the profit and loss account to quantify the % of return on initial investment (Pistor, 2013). The decision rule of the method suggests that CHTC only should accept a project if it’s ARR is equal to or above than set targeted rate.

Net present value: It seems as the most effective measure or tool of capital budgeting that considers present value of cash flows till the end of the project life duration. The decision criteria of this rule denote that CHTC must go to select that project which has positive plus higher NPV over the other. This technique is highly used by the investors

Internal rate of return: IRR identifies rate of return that is offered by a project irrespective to that of required return. Alternatively, it is that rate at where discounted value of cash inflows and cash outflows will be same at zero NPV. Likewise, the decision criteria of NPV, this method also suggest CHTC to select that project which indicates higher IRR.