Travel And Tourism 2

FINANCE AND FUNDING 

IN 

TRAVEL AND TOURISM 

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Table of Contents 

Introduction ................................................................................................................................................ 3 

Task 1 ......................................................................................................................................................... 3 

A) Calculation of unit costs and making pricing decision ............................................................... 3 

B) Calculate price of New Romantic Movement tour ...................................................................... 5 

C) Analysis of factor influencing profit for travel and tourism businesses ...................................... 6 

Task 2 ......................................................................................................................................................... 7 

Investment Appraisal Techniques ..................................................................................................... 7 

Task 3 ....................................................................................................................................................... 11 

Ratio Analysis ................................................................................................................................ 11 

Task 4 ....................................................................................................................................................... 13 

Analyse sources and distribution of funding for development of capital project .......................... 13 

Conclusion ............................................................................................................................................... 15 

References ................................................................................................................................................ 16 

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INTRODUCTION 

Finance and Funding can be defined as the crucial aspect for all the commercial companies who 

are putting tons of efforts to sustain in business for long term periods. However, both these elements have 

direct connections with growth and profitability. It is the duty of senior authorities of firm to ensure that 

financial resources are managed and utilized in optimum manner so to attain desired outputs (Cahill, 

2010). Looking at the condition of corporate market it become more significant for the companies to 

deliver best to its target audience otherwise it may have negative impact on overall future contingency. 

Financial resources are considered to be the most valuable assets that an organisation have which 

requires intense care and appropriate management to carry out business activities effectively and 

efficiently. Furthermore, finance manager has the responsibility of keeping proper balance between cots 

and volume in order to manage and use financial resource adequately. In the present research project, 

researcher is focusing on evaluating significance of finance and funding in travel and tourism sector. To 

elaborate this in detail, report consist of importance of cost, volume and profit in making smart decisions 

regarding future functioning. Researcher concentrates on evaluating three different methods of 

determining the price of per unit and on that basis making the best possible decision for setting pricing 

strategy. Other than this, report includes evaluation of different investment appraisal techniques to 

determine the feasibility and reliability of future investment. Lastly, By the means of financial 

information researcher will evaluate and analyse the financial position of Magical Mystery Tours Ltd 

using ratio analysis. 

TASK 1 

A) Calculation of unit costs and making pricing decision 

1) Analyse the figures to determine how many tourist booking require for break even point at price of 

30 per ticket 

Break even point refers to the point of zero loss or zero profit. In other words, at break even 

situation revenues of business enterprise are equal to the amount of its total costs and its contribution 

margin is equals its total fixed costs (Irwin and Scott, 2010). In order to compute break-even point 


manager have to use equation such as: 

px = vx + FC + Profit 

Where, 

P is the price per unit 

X is the number of Units 

V is variable cost per unit and 

FC is total fixed cost 

 

Breakeven point in Sales units = x = FC/ p – v 

Price per Unit = 30 

Variable Cost per Unit = 2 

Fixed Cost = 300 

Breakeven point in Sales units = 300/ 30 – 2 

Breakeven point in Sales units = 300/28 

Breakeven point in Sales units = 10.71 

 

Break-even point in Sales Pound = Price per Unit × Break-even Sales Units 

Breakeven point in Sales Pound = 30 * 10.71 

Breakeven point in Sales Pound = £321.42 

2) How many tickets of sale require by Magical Mystery Tours Ltd to earn a profit on 30 per ticket 

Profit = 500 

Price per ticket = 30 


Unit to be sold to earn 500= Fixed cost + desired profit / Contribution 

800/28 

3) Significance of cost and volume when determining how to make profit 

In financial management cost and volume play a crucial role because both these elements have 

direct impact on the overall functioning as they are highly correlated. When the volume is increases or 

decreases it directly effects on the cost of production. However, it is the duty of finance manager to 

manage and control financial resources in effective manner so that cost can be maintained (Narayanan 

and Nanda, 2004). Mainly, there are three types of costs i.e. fixed, variable and semi variable cost. 

According to the present given case, Travel and Tourism sector is becoming one of the most competitive 

market to operate in. There are various companies making valiant efforts to execute business activities 

by managing financial position systematically. In this regard, top level management of Magical Mystery 

Tours Ltd should identify different types of costs for preparing variable cots structure. By the means of 

this, management will be able to make feasible and effective utilisation of available resources and make 

smart decision for increasing profitability. 

 

 

Fixed Cost: This is cost which is periodic in nature and does not affect the change in production 

level. In the present case, fixed cost for Magical Mystery Tours Ltd is 300 pounds. This means it 

will not change on the basis of tickets demand and sales. Fixed cost for Magical Mystery Tours 

Ltd are maintenance cost, administration cost, depreciation of fixed assets and rental charges. 

Variable Cost: It is the amount of expenditure which changes as per the level of production. In 

this case, variable cost per ticket is 2. However, the variable cost of Magical Mystery Tours Ltd 

are fuel, food charges etc. 

Relationship between cost, volume and profit 

All three of the elements of managerial accounting are used to determine the change in costs and 

volume that directly affects the firm’s operating and net income. The main purpose of identifying 

relationship between these elements is that they aid in making decisions. Further, it assist manager in 


evaluating different ways of meeting firm’s net income goals. Following image assist in illustrating 

relationship among sales, fixed costs, variable costs and net income. 

Figure 1: Relationship between cost, volume and profit 

B) Calculate price of New Romantic Movement tour 

Capital employed 5000 

ROCE 20.00% 

Profit 1000 

Total price of ticket 6000 


Mark up 30.00% 

Total cost 3800 

Profit 1140 

Total price of ticket 4940 

Appropriate price for the Tour: 

From the above computation of both the methods it has been identified that price based on the 

method of mark-up value will be more feasible and suitable for Magical Mystery Tours Ltd in order to 

generate higher profits. Comparing both the methods it can be evaluated that price of Mark-up value 

method is higher than cost plus pricing method. The price as per the mark up method for a ticket is £4940 

per ticket which is comparatively low than the cost plus pricing method which is £6000 per ticket. 

Therefore, in order to generate higher profit of around £1140 than Magical Mystery Tours Ltd should 

undertake the pricing strategy of mark-up method set price accordingly. 

However, when comparing both the methods it can be said that, Cost plus pricing method is 

feasible for the company because it is helping the course of Magical Mystery Tours Ltd in generating 

desired profits as well as allowing the company to charge lesser price (£4940) for Romantic Movement 

Tour. Therefore, by the means of this method company can influence large couples to book the tour as 

well as provide them quality of services at affordable prices and achieve desired corporate aim of long 

term sustainability. 

C) Analysis of factor influencing profit for travel and tourism businesses 

Profitability of a business enterprise can be affected by several internal and external 

environmental aspects. However, there are some of the factors which are not in the control of businesses 

and raises the level of risks and uncertainties (Williams, 2012). Bellow discussed are some of the factors 

which needs to be taken care of by the senior authority of Magical Mystery Tours Ltd to attain growth 

and profitability. 

 

Seasonal Variations: In travel and tourism sector, seasons are of great importance. People likes 


different season to travel in different destinations. However, for creating demand about the 

services of tour packages it is important for top level management of Magical Mystery Tours Ltd 

has to develop tour plan as per the seasonal variations so that best possible services can be offered 

to clients (Helfrit, 2001). For example: there is high demand in June and July in travel industry 

as the prices of tickets are relatively high as compared to other months. 

 

 

 

Economic environment: In economic environment factors like purchasing power, per capital 

income and inflation rate in the economy are majorly concerned. Positive alteration in economic 

condition encourages senior managers of Magical Mystery Tours Ltd top explore new 

opportunities so that company can attain growth in near future. 

Tactics of competitive firms: Competition leads to affect the pricing structure of Magical Mystery 

Tours Ltd. In case, if the price of competitor fluctuates than it is important for senior managers 

of cited firm bring modifications within the pricing policy. However, customers will face the 

obligations of fluctuations (Liu and et. al, 2007). Therefore, it can be stated that Magical Mystery 

Tours Ltd has to make changes in its pricing strategy by considering the strategies of competitors. 

Political environment: There are several ways in which political environment can affect the 

functioning of business enterprise. However, Tax is considered as one of the most significant 

element which changes with the political environment. Magical Mystery Tours Ltd is working 

in such a dynamic political environment of UK, that its managers are responsible to generate 

desired results and outcomes easily. Decision regarding tax increase and decrease may affect the 

overall profit margin of the cited firm. 

TASK 2 

Investment Appraisal Techniques 

Capital investment appraisal also known as capital budgeting. However, it is primarily a planning process 

which facilitates the determination of concerned firm investments both short and long term. The main 

aim of using these investment techniques is to evaluate and analyse the financial viability and reliability 


of the investment. There are several appraisal techniques which are used by managers to evaluate and 

analyse the reliability of project (Jin, Yu and Mi, 2011). All the techniques have different implications on 

the outcomes and helps management in making smart and effective judgement on the future contingency. 

Following are the three main investment appraisal techniques: 

Payback Period: It is one of the easiest methods of computing feasibility and reliability of a financial 

project. The main purpose behind calculating this techniques is that it assist managers in identifying the 

time required by project to regain the invested amount, this process is termed as payback period. In 

general less the time require by any project is considered to be more feasible as compared to ones with 

longer payback periods (Hopwood and Mckeown, 2003). The formula to compute payback period of a 

project highly depends upon the cash flow per period from the project is even of uneven. In case of even 

the formula to calculate payback period is: initial investment / cash inflow per period. While on 

the other hand, in case of uneven cash flows, manager have to calculate the cumulative net cash flow of 

each period and then use in the following formula: A + B / C. 

Where, 

A is last period with the negative cumulative cash flow; 

B is the absolute value of cumulative cash flow at the end of period A; 

C is the total cash flow during the period after A. 

In the present given scenario, cash flows of two projects has been shown which will help 

researcher in evaluating and comparing the both the project easily (Beck, Levine and Loayza, 2000). 

Looking at the uneven cash flows it is important for manager of Magical Mystery Tours Ltd to calculate 

cumulative value and then evaluate the time required to regain the initial investment. 

Project A: 

year Inflow Cumulative inflow 


0 -£80,000 -£80,000 

1 £35,000 -£45,000 

2 £35,000 -£10,000 

3 £40,000 £30,000 

4 £50,000 £80,000 

Payback Period 

2.25 Years 

Project B: 

year Inflow Cumulative inflow 

0 -£1,50,000 -£1,50,000 

1 £30,000 -£1,20,000 

2 £45,000 -£75,000 

3 £75,000 £0 

4 £75,000 £75,000 

Payback period 

3.67 Years 

From the above technique of investment appraisal it can be evaluated that, in comparing both the 


project's payback period Magical Mystery Tours Ltd should invest in Project A. However, it is because 

this project will assist top level management of cited firm to recover initial investment in 2.25 years. On 

the other hand, Project B will recover the initial investment at 3.67 years which more as compared to 

Project A. Therefore, from payback period it can be stated that Magical Mystery Tours Ltd top level 

management should invest in project A for minimizing risks and uncertainties in near future as well as 

generate desired results and outcomes. 

Accounting Rate of Return: Accounting rate of return is the method which helps manager in 

evaluating the return earned from the projects which clearly means that if business has invested in certain 

project than either it is generating return or not able to recover the amount (Beck, Levine and Loayza, 

2000). In other words, it is the ratio of estimated accounting profit of a project to the average investment 

made in the project. Formula of calculating accounting rate of return is: Average accounting profit / 

Average investment. However, it is the arithmetic mean of accounting income that is expected to be 

earned during each year of the project's entire lifetime. Moreover, in this investment appraisal technique, 

return which will be earned by firm at the end of the life of whole project is calculated as it does not 

determines the yearly return values from cash inflows (Lampe and Hofmann, 2013). Other than this, it 

also does not consider the present value of the money as it operates on the normal values of the inflow 

from the project. 

Project A: 

year 

Inflow 

1 £35,000 

2 £35,000 

3 £40,000 

4 £50,000 

Total inflow £1,60,000 


Average inflow £40,000 

average investment £80,000 

ARR 50.00% 

Project B: 

year 

Inflow 

1 £30,000 

2 £45,000 

3 £75,000 

4 £75,000 

Total inflow £2,25,000 

Average inflow £56,250 

average investment £1,50,000 

ARR 37.50% 

From the above computation of accounting rate of return it can be evaluated that for Magical 

Mystery Tours Ltd Project A will give the return of 50% which is highly beneficial in such competitive 

market. On the other hand, Project B is generating the return at 37.50% which is comparatively low as 

compared to Project A. Therefore, it can be recommended to senior authority of Magical Mystery Tours 

Ltd that they should invest in Project A as it will help them in generating higher returns and increase the 


chances of future growth and profitability. 

Net present Value: Net present value is the calculation that assist finance manager in comparing 

the amount invested today to the present value of the future cash receipts from the investment. It is 

considered as the most significant tool of evaluating and analysing the feasibility and reliability of 

investment project (Diamond, 2002). The main purpose behind selecting this technique is that it accounts 

for time value of money by using discounted cash flows. Furthermore, this approach considers present 

value of money as the value of cash can change in different situations of market which may be due to 

inflation or deflation. Along with this, Net present value also does not calculate that what amount of 

return will be generated from this method. In corporate world it is the mots used approach to analyse the 

feasibility and it is all due to its reliability of determining correct and suitable outcomes. Following is the 

computation of net present value for Magical Mystery Tours Ltd. 

Project A: 

Year Cash flow (£) P.V. Factor @ 10% Present Value (£) 

1 35000 0.909 31815 

2 35000 0.826 28910 

3 40000 0.751 30040 

4 50000 0.683 34150 

Total Present value 124915 

Initial investment (80000) 

Net Present value 44915 

Project B: 


Year Cash flow (£) P.V. Factor @ 10% Present Value (£) 

1 30000 0.909 27270 

2 45000 0.826 37170 

3 75000 0.751 56325 

4 75000 0.683 51225 

Total Present value 171990 

Initial investment (150000) 

Net Present value 21990 

From the above calculation of net present value of both projects it can be stated that, top level 

management of Magical Mystery Tours Ltd should consider Project A for the future investment because 

it is showing higher results as compared to Project B. However, Net present value of project A is 44915 

as compared to project B 21990. Therefore, calculation clearly illustrates that project A is more feasible 

in terms of investment as by the means of this Magical Mystery Tours Ltd will generate higher returns 

maintain its position in such competitive market. 

Henceforth, from the above computation of all the investment appraisal techniques it can be 

recommended that, project A is more feasible for Magical Mystery Tours Ltd to invest in as it is showing 

higher return than project B when compared. 

TASK 3 

Ratio Analysis 

Ratio Formula Calculation Outcome 

Current ratio Current Assets / Current Liabilities 1100/500 2.2 

Quick assets or Current Assets – Inventories / Current 1100-600/500 1 


acid test ratio 

Return on capital 

employed 

Gross profit 

margin 

liabilities 

EBIT / Capital employed*100 300/3600*100 8.33% 

Gross profit / net sales*100 800/1200*100 66.67% 

Net profit margin Net profit / Net sales 300 / 1200*100 25.00% 

 

 

Current Ratio: It is a financial ratio that assist in measuring whether or not company has the 

capability or enough resources to pay its short term debt over the next one year. In other words it 

shows the market liquidity of firm and its ability to meet creditor's demand. However, current 

ratio vary from one industry to another but it is generally between 1.5 and 3 for a healthy running 

business (Mongiello and Harris, 2006). Having higher current ratio clearly indicates that firm is 

maintain and managing financial resources effectively and due to which it is able to meet its short 

term financial needs and wants. According to the present given scenario, current ratio for 

Magical Mystery Tours Ltd is showing fruitful results of 2.2 which is comparatively high in the 

travel and tourism industry. By the means of this outcome it can be said that, top level 

management of Magical Mystery Tours Ltd are making optimum utilisation of available financial 

resources in order to meet short term financial needs. This also shows the ability of company in 

paying current liabilities which is feasible and reliable enough in terms of competitiveness of 

travel and tourism sector. 

Quick Assets or Acid Test Ratio: The main purpose behind computing this ratio is to evaluate and 

understand the relationship between quick assets and current liabilities of the firm. Acid test ratio 

highlights the ability of Magical Mystery Tours Ltd in meeting out its short term financial 

obligations with its most liquid assets (Paulo, 2010). By the means of this ratio, manager can 

understand how quickly and easily assets can be converted into liquidity for meeting short term 

financial obligations. In general terms, acid test ratio should be 1:1 or higher but it totally depends 


upon the nature of industry (Steffan, 2008). However, higher ratio indicates better liquidity 

position of business and vice verse. According to the present given information, acid test ratio of 

Magical Mystery Tours Ltd is 1 which is relatively good in travel and tourism industry. This 

indicates that, there are adequate assets which can be converted into cash whenever required to 

meet short term financial needs. This outcome also indicates that cited firm's quick assets are 

equal to current liabilities. 

 

 

Return on Capital Employed: This ratio highlights the relationship between net profit and capital 

employed by the firm. Herein, capital employed is evaluated by deducting current liabilities from 

the total assets available with the firm. The main aim of computing this ratio is that it assist in 

comparing profitability of companies after taking into account the amount of capital invested 

(Atrill and McLaney, 2008). This helps in proving the value of business which it will gain from 

the use of its assets and liabilities. However, companies create value when they are able to 

generate higher returns on capital above the weighted average cost of capital (WACC). The main 

drawback of this ratio is that it measures the return against the book value of assets available in 

the business. In the present given case, return on capital employed for Magical Mystery Tours 

Ltd is 8.33% which clearly indicates that firm is generating relatively average returns by 

employing its capital. This result indicates that managers have to make efforts in attracting large 

investors to invest in business and enhance the level of business enterprise. 

Gross Profit Margin: Through the help of gross profit margin, managers can understand the 

relationship between gross profit and net sales. Further, it also defines how much Profit Company 

earned form its sales to execute future business activities. In other words, it is the difference 

between revenue and cost before accounting for certain costs or expenditures. The main purpose 

behind computing this ratio is that it helps in determining the value of incremental sales as well 

as creates appropriate platform for managers to make decision regarding pricing and promotions 

(Cadle and et. al, 2010). From the above ratio analysis table it can be evaluated that, gross profit 

margin of Magical Mystery Tours Ltd is relatively high and showing fruitful results. This 

outcomes clearly indicates that cited firm have good and adequate margin over its entire sales. 

This shows company is making valiant of efforts to minimize the cost of sales and increase overall 

revenue. However, higher profitability of company means overall better financial position. 


Net profit margin: net profit ratio assist in evaluating the efficiency of business enterprise in 

managing and controlling the expenses which are related to administration, manufacturing, 

selling etc (Financial ratio and Analysis, 2013). However, this ratio shows the relationship better 

net profit and entire sales of Magical Mystery Tours Ltd. The main purpose behind computing 

this ratio is to make internal comparison within business and accordingly judge the performance 

of firm's activities. A low margin of profit indicates a low margin of safety and higher risk that 

will reduce the sales and minimize profits which may result in net loss of a negative margin. In 

the present case, net profit margin of Magical Mystery Tours Ltd is showing positive outcome. 

25% of net profit margin clearly indicates that cited company is generating higher returns on its 

sales which ultimately increases profit margin. 

TASK 4 

Analyse sources and distribution of funding for development of capital project 

To, 

The Chief Executive, 

Magical Mystery Tours Ltd, 

London 

Subject: Different source available for funding 

Respected Sir, 

Operating in is such competitive market of travel and tourism it is important for firm to look for 

expansion at constant period so that they can maintain position in market and generate desired results 

and outcomes. For the present case two project has been chosen: development of tourism information 

system and small tourism and environmental improvement with associated information (8 Tips and 

Resources for Managing Your Business Finances). The main purpose behind selecting these projects is 

to enhance the management of data as well as sharing information easily and providing appropriate 


platform for customers to present their feedbacks, needs and wants. In order to carry out both the 

projects it is important for top level management of Magical Mystery Tours Ltd to undertake both public 

and private source of funding which are as follows: 

 

 

 

Government Funding: This is considered as one of the most significant source of public funding. 

By the means of this, Magical Mystery Tours Ltd can generate large amount and execute or 

carry out both the projects (development of tourism information system and small tourism and 

environmental improvement with associated information) in appropriate manner (Riley, 2012). 

In this government initiate in providing funds for the development of specific region so that 

society can be improved. Therefore, this source can be used for the commencement of projects 

and expand business for better future contingency. It is also one of the major source of public 

funding. The main purpose of this source is that it helps in acquiring large amount which are 

issued in the purpose of enhancing the level of society so that standard of livings can be 

improved. Major benefit of national lottery committee source is that it is cheap and can be 

obtained for long term periods. Therefore, senior managers of Magical Mystery Tours Ltd 

should focus on such source and execute both the projects feasibly and smartly. 

Equity Funding: Equity financing is one of the most effective public source of funding. By the 

means of this large amount of money can be gathered and utilize for different purposes. In this, 

Magical Mystery Tours Ltd has to issue shares in the market and attract shareholders to purchase 

shares and raise the capital for future expansion. Another benefit of this source is that, principle 

amount is not paid to its holders, infect company has to pay interest to its shareholders in the 

form of dividend at the end of financial period (Management accounting. 2014). On the other 

hand, this source is risky and can harm the overall performance of business enterprise in the 

existing market. 

Debt Funding: There are several financial institution available in the market who are providing 

funds at different interest rates. This is considered as long term borrowing where firm has to 

pay interest at certain amount at the end of every month. Magical Mystery Tours Ltd can borrow 

money from bank and carry out expansion process. The main benefit of this source is that it 

enhances liquidity position of business but also increases the liability in terms of monthly 


interest. 

Date: 22 nd June 2015 

Finance Manager 

CONCLUSION 

In conclusion to above report it can be evaluated that finance and funding are the two major 

aspects of business enterprise which needs to be managed and controlled in effective and efficient 

manner. In the first part report highlight the importance cost and volume in making decision regarding 

pricing strategy. With the help different method best possible pricing method has been recommended to 

Magical Mystery Tours Ltd which is Mark up Cost pricing method. Other than this, in the second part 

different investment appraisal techniques has been used to evaluate and determine the reliability 

However, through the computation Project A has been recommended to Magical Mystery Tours Ltd for 

future investment as it was providing higher returns for the the firm in such competitive market. Lastly, 

financial tool ratio analysis has been used to evaluate the financial position of business in 2014. Through 

the help of different ratios, liquidity and profitability of Magical Mystery Tours Ltd has been evaluated 

and it clearly indicates that despite of working under such high competition company is generating better 

returns due to which its financial position is stable. 


REFERENCES 

• Atrill, P. and McLaney, E., 2008. Accounting and Finance for Non-Specialists. 6th ed. Financial 

Times/Prentice Hall. 

• Beck, T., Levine, R. and Loayza, N., 2000. Finance and the sources of growth. Journal of Financial 

Economics. 58(1-2). pp.261-300. 

• Cadle, J. and et.all., 2010. Business Analysis Techniques: 72 Essential Tools for Success BCS, The 

Chartered Institute. 

• Cahill M, 2010. Financial Times Guides: Making The Right Investment Decision: How to analyse 

Companies and Value Shares, 2 nd edition (ROCE). 

• Diamond, J. 2002. Performance Budgeting--Is Accrual Accounting Required?. International 

Monetary Fund. 

• Helfrit, E., 2001. Financial analysis tools and techniques. McGraw Hill Professional. 

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