Proposition of Conceptual Framework †Free Samples to Students

Question: Discuss about the Proposition of Conceptual Framework. Answer: Introduction The report is about making a financial decision relating to various aspects in which a UK company is selected as a base and then various decisions are made using the stated company. This report is a foreword to board of directors of the Thomas cook group which has a remarkable position in the travel and tourism industry. It also critically examines the various sources of finance which can help the organization for expansion. It also contains a detailed analysis of various pricing strategies and recommendations given to the stated company to apply the most appropriate strategy. It analyses the behavior of costs along with some examples and graphs, where it also includes a brief description of what cost and volume analysis is and how it helps in decision making. This report critically examines the all aspects stated above relating to the stated company and how the stated company applies the same. The Thomas Cook Group in the history of innovation remarked as the best known company in leisure travel. It started in late 1841 by an English man named Thomas Cook. In year 2007 , it merged with My travel which has a major significance as it placed the company to 2nd position in travel and tourism industry. After merger it had a market share of 27% in the travel and tourism industry (Buhalis and Jun, 2011). Merger was made to reduce the debts and cutting the costs which was faced by the company. It also helped to gain economies of scale and also to reduce the competition. In the year 2010, it again made a major move by merging with Cooperative Group; this bought synergies in the business and reduced costs significantly. Due to these mergers the share price increased and stock markets destroyed position recovered (Goeldner and Ritchie, 2012). This organization is in the phase where it has everything organization needs, committed workforce, market standing and a remarkable financial p osition. Sources of finance The most important factors to be considered for growth and business expansion is finance. Without this factor the expansion could not even be thought of. There are various sources of finance but the analysis and recommendations are given Following are the sources of finance through which company can expand- Retained Earnings It is the most common practice to expand via retained earnings. It is companys savings which is not distributed to shareholders and not to itself. It has a merit that we are not required to look for outside financing but its demerit is the finance available for expanding is limited. The stated company has retained earnings of 374m which it can easily use for expanding the customer base (Thomas Cook Group, 2016). Equity Capital- It is the largest source of financing since the only funding which is done in public markets is equity capital. But for equity capital it is important that the company should have successful operations. Since the stated company is one of the best companies in travel and tourism and has a band image it can easily raise money through equity capital (Han and Hyun, 2015). It is even profitable for the company to arrange funds through equity since it has no paying schedules and dividend is totally based on companys performance. Debt Financing- It is one of the main sources of financing. It is less risky than equity share capital because it has a predetermined schedule of payment of interest and principal amount. It is obtained against the cash flow or assets of the firm. It is based on how the company is performing and its growth perspective. The stated company can take debt or not will be clarified only after we calculate debt-equity ratio. The ideal debt equity ratio should be 2. Debt-Equity ratio of the company as per the audit report is 0.25 which is optimal. Company can go for debt financing easily. Cash flow financing Cash flow financing is basically of two types , one is short term financing which covers debt less than one year and the other is long term financing which has a repayment period of more than a year. It is available only to well establish companies. These types of funding are provided by banks, finance companies and insurance companies. There may be some conditions by these companies for providing loan such as keeping minimum cash balance or by limiting the debt. The stated company can go for such financing if it does not want to increase the ownership in the company created by raising equity. Asset based financing- It is the type of financing in which loan is provided against the assets of the company. The assets such as inventory, receivable, stock, equipment and so on. In this the company pledges its assets and if in case default, the lender takes the possession of the asset. Since the stated company has lot assets and can easily acquire loans by pledging the same it can easily go for such type of financing. Internally generated Financing Some careful activities can lead to considerable financing without borrowing it with any source. These activities can be collecting bills on time, obtaining credit notes from suppliers so that substantial time may be available for the same, reducing inventories and keeping minimum cash balance and selling off assets. By these strategies company can make its financing by regularizing the administration. Smart Leases - It is a source of financing in which assets are taken on lease so that cash is saved for working capital. But this source of finance can be risky in some companies. It may also be seen that sometimes lease rates are higher than bank loan so it will be of no use to pay more when a down payment can get u an asset. So the stated company should not go for such financing. Behavior of costs The production costs which change with the change in level of production is called as Cost by behavior. It consists of three main types of costs which are described as under Fixed Costs- the cost which does not change with the change in the level of activity is called as fixed costs. These are those costs which will occur even if there is nil or no production in the organization. It is the costs which has inverse relationship with the quantity that is with the increase in quantity the cost decreases and vice versa. . It is important to understand that the high proportion of fixed cost means that business is continuing at relatively high revenue level to sustain in the business (Shephard, 2012). Examples of fixed costs are amortization costs, depreciation, insurance interest expense rent, property taxes salaries and other utilities. The above figure describes the relationship between total fixed cost and the number of units produced. It can be seen that fixed cost remains constant irrespective of units produces. And the other figure shows us that with the increase in production fixed costs decreases (Papista, and Krystallis, 2013). Variable Costs- It is the cost which changes with the change in production. It means that it is in direct proportion with levels of production. But variable costs in total are different but per unit of variable costs remain constant. These costs will not be incurred if the company has nil production. It is important to understand that the high proportion of variable cost means that business is continuing at relatively low revenue level (Farrow and Zerbe, 2013). Example of variable costs is direct materials, labour charges, production supplies, commissions, freight, credit card fees, and billable staff wages and so on. The above figures depict the relationship of units produced with the variable costs. With the increase in production the variable cost also increases. Whereas the other figure depicts that the variable cost remains constant in per unit but varies in total as divided by number of units (Jaafar et al, 2011). Mixed Costs- This cost is the cost which has a characteristic of both fixed and variable costs because of presence in both fixed and variable components in it. There is various cost behavior techniques used to split the cost between the fixed and variable components. These techniques are high-low method, scattered diagram method and regression analysis. It is also known as semi variable costs. Examples of mixed costs can be a telephone bill since it is fixed up to line cost and subscription charges and then changes with the usage that is per minute cost. Another example can be delivery cost which consists of fixed cost of depreciation and variable cost as fuel (Drury, 2013). Importance of CVP analysis in decision making function For organization success it is very important to implement cost management and to implement a cost structure. Cost volume profit analysis also known as CVP analysis is used as decision making tool in the company. It is a cost accounting method used to calculate the breakeven point in cost and volume of goods. The emphasis of this tool is laid down because it helps the manager to estimate the future cost, revenue, expenses other associated costs and profit. It helps to monitor the level of activity in the production (Chitty, 2012). It also helps in avoiding loss, estimating target profit and maximizes the production. It is one of the essential parts of profit planning process in the organization. It also helps in evaluating the reasonableness and budgets.it helps the management to understand the most important objective by combination of costs and volume (Martin, Nunez and Castle, 2011). Pricing strategies and its recommendation Setting a pricing strategy for tourism is a mix of marketing strategy and financial analysis. When expansion is done it is to be taken care that pricing of the product is lower than a long term pricing since to attract volume and set up the brand in the industry (Becerra, Santalo and Silva, 2013). Pricing strategy consists of various components such as rack rates which means full time rates before offering any discount, the other is seasonal pricing which means a mix of pricing which depends upon the different levels of demand during the year and the last one is last minute pricing which is the last minute discounting prices to fill up the vacancy and promoted on last minute booking sites (Hosni et al., 2013) Per- person pricing- this type of pricing is commonly used by tour operators, backpackers. It may include adult, children and senior citizens. Per-unit pricing- this is the set of price quoted for one unit. For example an accommodation is given for 2 people with a per unit package without diving the same in per person rates. Single or double occupancy- It works on single rate or double rate and the double rate is not the double in numeric terms of the single rate. The pricing strategy to be followed by Thomas cook group depends totally on the expansion strategy they adopt. The sources of finance they select and accordingly the other aspects will be considered (Mina, 2014). Conclusion This report critically examines the case of a famous and prominent company of travel and tourism known as Thomas Cook Group. The report is prepared to present the board of directors with the plan of expansion of the companys operations and for the purpose of which various sources of finance is being described. The recommendations suitable to the company are also provided. Later in the report the discussion is made of various types of behavioral costs and the graphs and examples are stated for clear understanding of the concept.it is also clarified in the report about various pricing strategies available with the company and which should be selected for efficient and effective implementation of expansion. It is also clarified that this report is just based on the facts as per the auditors report there may be several conditions which are present in the organization but is not reflected in the auditors report. There are various factors which affects the expansion strategy of the organiz ation but this report considers only three aspects which includes sources of finance, decision making using CVP analysis, the behavioral costs related pricing strategies. References Becerra, M., Santalo, J. and Silva, R., 2013. Being better vs. being different: Differentiation, competition, and pricing strategies in the Spanish hotel industry.Tourism Management,34, pp.71-79. Buhalis, D. and Jun, S.H., 2011. E-tourism.Contemporary tourism reviews, pp.1-38. Chitty, J., 2012.Chitty on contracts: General principles(Vol. 1). Sweet Maxwell. Drury, C., 2013.Management and cost accounting. Springer. Farrow, S. and Zerbe, R., 2013.Principles and Standards for benefit-cost analysis. Edward Elgar Publishing. 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