ACCOUNTING FOR DECISION MAKING

To interpret my accounting knowledge and skill and to prove myself capable of the internship, I have chosen option one that is the Sales and Marketing Department, for an internship as I feel it is the area of my interest. As the scenario was to refurnish the Crystal Hotel and build a Wellness Center on the rooftop. So, on behalf of my selection, I have completed the following assessments to show my skills related to the job:

TASK 1: Buy Vs. Rent Option

To facilitate the Wellness Center project, the hotel is considering to buy or take on lease some gym equipment. So, by considering all the options and tax deductions, it is decided to buy the equipment by keeping in view all the perspectives along with the advantages. In addition to this, and by analyzing the situation of the company, leasing the equipment is consistently remain avoidable for the hotels like Crystal hotels. Leasing is the option of the companies having limited capital, and they require the equipment to upgrade their necessities. Therefore, to purchase the equipment always remain in favor of the company, and it is for the well-off of the business, or in either case, the equipment necessitates a long and usable life. The supportive data to this decision is as follows:

Calculations:

 

BUY OPTION

 

Cost

Discounted Residual Value

Servicing

Total Cost over 3 years

Treadmill (5 pieces)

$30,285

$6,057

$909

$25,137

Elliptical Trainer (3 pieces)

$12,117

$2,423

$364

$10,057

Exercise Bike (5 pieces)

$16,660

$3,332

$500

$13,828

Rowing Machine (3 piece)

$8,178

$1,636

$245

$6,788

Total Cost

$67,240

$13,448

$2,017

$55,809

 

RENT OPTION

 

Discounted Value
Year 1

Discounted Value
Year 2

Discounted Value
Year 3

Total Cost over three years

 

$9,120

$8,601

$7,511

$25,232

 

$2,806

$2,646

$2,310

$7,762

 

$4,185

$3,947

$3,447

$11,579

 

$2,328

$2,195

$1,917

$6,440

Total Cost

$18,439

$17,389

$15,185

$51,013

 

Advantage & Disadvantages of Buying:

Advantages

  • Although, to buy the equipment is a smart investment. But it has a high initial cost, but the overall cost of owning the exercise machine is cheap as compared to the rent them. The other perk of buying the equipment is it is considered as an asset that can be sale back, and the owner can get the investment back.
  • Owning the equipment have the benefit of doing the necessary alterations because the maintenance is in the hands of the owner and can be fixed immediately. There is no need to take permission to make the changes.
  • Buying is comparatively easier because the owner does not need to deal with the agreement and the long contracts.

Disadvantages

  • The higher cost is associated with buying the equipment as compared to monthly payments.
  • It is expensive to pay once for the equipment. Sometimes high cost keeps away from buying exactly what the manager wants.
  • As in this advanced era, technology keeps changing o a daily basis, and buying the equipment can stick you to outdated technology.
  • Maintenance all depends on the owner, which makes the equipment pricey.

Advantage & Disadvantages of Leasing:

Advantages

  • On the other side of leasing, the equipment might be a good option for the new and small owner of the gym who is lacking the investment. Although the lease is an easy option and has more flexibility having a tax deduction. Moreover, the payments can be managed at initial stages, but to lease the equipment is expensive over time, and one cannot gain the asset.
  • While leasing the equipment, one has not to pay for the maintenance. The leasing company is responsible for the wear and tear of the equipment.
  • Leasing is good because one can acquire updated technology quickly. This can keep the owner to remain competitive.

Disadvantages

  • Most of the leasing options have an interest to be paid, which makes it expensive.
  • Equipment is not owned, and there is no equity.
  • No option to sell the equipment.
  • The available length of the leasing terms might be longer as compared to the need.

TASK 2: Membership Decision

The sales and marketing manager is thinking of offering external memberships of two types to increase the revenues of the hotel and wellness center. This task required to make an analysis and discussion, whether it is suitable or not.

Calculations:

 

Membership (Basic $40/month, Full Package $81/month)

Membership Project

Cash Outflow

Cash Inflow

Net Cash Flow

Tax

After-Tax CF

PV Factor

Year 0

$53,373

$0

-$53,373

-$16,012

-$69,385

 

Year 1

$108,000

$151,000

$43,000

$12,900

$55,900

$51,759

Year 2

$111,840

$166,100

$54,260

$16,278

$70,538

$60,475

Year 3

$115,834

$182,710

$66,876

$20,063

$86,939

$69,015

 

                                                                                    NPV

$181,249

Decision:

Based on the calculation done for net present value, it is recommended that offer membership to external clients will be beneficial. Because the net present value is used to analyze the business profitability of a project or the investment, which has to be made in budgeting the capital, and it is calculated by using the difference between the cash inflows and cash outflows in the given period. So it is analyzed that at different periods, the difference is negative in the 0 years, which leads to $43,000 in the year one net cash flow is $43,000. While considering the year's net cash flow is 3$54,260 and leads to $66,876 in year 3. So after the inclusion of cash flow and the present value, the manager decided to open the membership to external people because the Net Present Value is beneficial for the hotel and is amounted for $181,249.

In the given case, the NPV is positive and indicates that the investment in membership for external people will remain beneficial. Moreover, it is also analyzed that the present value is more as compared to the cash invested. So it will be a better option to expand the business.

TASK 3: Promotional Budget

            This task related with the useful and best promotion budget under $12,000. So, following strategies are considered best within the budget:

Calculations:

 

Promotional Budget

Item

Price (excluding GST)

GST

Price (including GST)

Quantity Required

Total Budgeted Value

Medium Billboard

$2,610

$261

$2,871

$2

$5,742

Flyers

$624

$62

$686

$2

$1,373

The Paramatta Times

$1,132

$113

$1,245

$2

$2,490

Retail Advertising

$423

$43

$466

$3

$1,398

Digital Foyer Advertising

$315

$32

$347

$3

$1,040

TOTAL

 

 

 

 

$12,043

 

Discussion:

As the promotional activity is associated with the additional cost. So this promotional activity offers a blueprint for the monetary expenditures, which are necessary to convey the message that is considered to be in the appropriate market while bringing in the perspective of sales (Aurora, 2009).  However, many different associated techniques can able to make the promotional budget to exist, and then combining these can work in the best mode that comes towards the most precise budget. These techniques mainly include the previous data related to membership, data on the projected promotions, competitive parity, and objective-based.

Moreover, the highly growing organizations that can able to generate critical resolution and consider the different aspects regarding the sourcing that can be understood. These can be the owner and comprehending the operations are not equal. Additionally, the preservation of necessitates it.

However, the company can lean on the vendors to get support. To promote the wellness center, the hotel has divided the promotional strategies into a billboard, which costs $5,742, flyers which have cost including taxes for $1,373. While the cost of The Paramatta Times is $2,490. Retail advertisement is for $1,398, and the digital foyer advertisement is for $1,040. These all accounted for $12.043, which is in the range of the fixed budget for the advertisement. So I open that these advertisement strategies are in favor of retaining the clients and maintain the new clients as well.

TASK 4: CVP Analysis

 This task-related with the useful and best promotion budget under $12,000. So, the following strategies are considered best within the budget:

Calculations:

CVP ANALYSIS

CM

$90

CMR

69.23%

Break-even (units)

389

Break-even ($)

$50,556

Number of services required to earn a target net profit of $150,000

2056

 

Discussion:

The CP or the cost volume profit analysis is that method that is related to the cost accounting and looks at the impact on the operating profit as well. This has a different and varying cost level and volume, as well. This analysis is also known as the analysis of break-even. This can help to determine the break-even point for the different volumes of sales and the structures of cost, which can help the managers to make the short terms of economic decisions.

This analysis has many assumptions that must include in the sales price, fixed cost, and the variable cost per constant unit. This analysis is the difference between the total sales and the total variable costs, which make the business profitable and can contribute the margin, which must be exceeded to the total fixed cost, but it is calculated to the per-unit cost (Alnasser, 2014).

As the analysis determines that the contribution is $90. This is that portion of sales revenue that has not been consumed by the variable cost and can able to contribute to cover the fixed cost. So $90 depicts that is $ 90 is that portion which can contribute to the fixed associated cost of the Crystal hotel.

The contribution margin ratio is that ratio, which is the difference between the sales of the company and the variable expenses, which are usually presented in the percentage (Ekergil, 2017).  This margin indicates that margin that must be generated by the entity that mainly represents the total available earning, which has to pay to meet the fixed expenses and the ability to generate the profits. However, in the given case, the contribution margin ratio is 69.23%, which is enough to generate the profits and can cover the fixed cost as well. This depicts that the hotel is operating well and leading towards beneficial operations.

The break-even point or the level of break-even represents the number of sales in the form of units or terms of sales like revenues. This is required to cover the total cost that mainly consists of both variables as well as the fixed cost to the company. Hence it is analyzed that the total profit at the break-even point is zero. While in the case of the Crystal Hotel, the break-even unit is 389, which shows that the breakeven point will be met when the hotel reaches to this unit of sales. This is that point where the hotel will suffer no loss and no profit.

However, breakeven in terms of dollars is $50,556, which represents that the sales amounted for $50,556 will be considered that the level of sales where the hotel reaches to get the break-even point. To analyze the number of services required to earn a target net profit of $150,000 for the year is 2056, which can help to meet the target margin profit.

Cost Volume Analysis

The CVP analysis is an important analytical tool that helps to analyze the importance of the relationship between cost, volume, profits, and prices. It is an extension or considered as part of marginal costing. It represents an integral part of the planned profit, along with the process of the hotel.  Therefore, the formal planning of the profit and the associated control use the budgets and then forecast the CVP analysis that provides an overview of the profit in the phase of planning. Also, it helps to evaluate the purpose and the rationality of the forecast the budget. So it is effective for the promotion of the hotel analysis.

However, it is suggested by some of the upper authorities that per head charges should increase; this will raise the profit of the hotel.  

 

 

References

 

Alnasser, N. S.-Z. (2014). The Effecy of Using Break-Even-Point in Planning, Controlling, and Decision Making in the Industrial Jordanian Companies. International Journal of Academic Research in Business and Social Sciences. Vol. 4, No. 5, pp. 626-636.

Aurora, M. N. (2009). (2009). Cost and Management Accounting: Theory, Problems, and Solutions. Delhi: Himalaya Publishing House.

Ekergil, V. (2017). Use of Cost-Volume-Profit Analysis Technique in Customer Profitability. Analysis and Model Suggestion for Businesses. Journal of Business Research Turk, 

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