Financial and Profitability Analysis for the Lallybroch Culloden Tours (Case Study Sample)

Question 1
Profitability Analysis
Profitability can be defined as a business's profit after selling its products and services minus the costs incurred. Profitability analysis is used to analyze an organization's output profitability. The organization's profitability can be measured using the return on investment (ROI) and residual income formula. The return on investment is a financial ratio used to compute the benefit an investor receives in correlation to the cost of investment. It is commonly measured using the net income divided using the original cost of capital for investment. The residual value defines the amount of operating income a business generates more than the minimum rate of return required or the income desired. Residual income is a performance assessment tool that organizations use to evaluate their business assets. Residual income computation uses a formula that deducts the minimum rate of return required and average operating assets from operating income. Exhibit 2 is computed in excel, as shown below:
The return on investment for 2016 is 8%, which is below the required rate of return of 9%, which means the organization is inefficiently using investments to generate profits. The return on investment for 2017, 2018, and 2019 are 12%, 10%, and 10%, respectively, above the required rate of return to show that Craig Na Dun efficiently used its investments to generate profits. The return on investment for 2020 is 9% which equals the required rate of return to indicate that Craig Na Dun did not gain or lose on the investment made.
The residual income for the year 2016 was a negative -0.32 to mean that they failed to generate the desired amount of income in that financial year. 2017, 2018, 2019, and 2020 values are 0.8, 0.26, 0.215, and 0.08, respectively, showing that Craig Na Dun could generate the desired income amount for each financial year.
Yes, they require a balanced scorecard, a vital tool that Craig Na Dun would use to identify and improve their internal operations by measuring the past performance data that will influence future decision-making. The balanced scorecard will assist in better alignment of projects and initiatives, improved performance reporting, and enhanced strategic communication and execution.
Question 2
Costing Analysis
Cost analysis also referred to as benefit-cost analysis, is used to assist businesses in analyzing the decisions to take and which to let go of. The contribution margin is used to establish the relationship between revenue, costs, and profits.
Lallybroch Tour (4 days) Contribution margin per trip

Item

Costing

Total

Revenue (# of Guests x Price/Guest)

$1,100*25

$27,500

Operating cost



Transportation (fuel/maintenance)


$ 2,750

Guide Wages


$ 7,500

Total costs


$ 10,250




Contribution margin per trip

$27,500-$10,250

$17,250

The contribution margin per trip for Lallybroch Tour is $17,250, as computed in the table above.
Lallybroch Tour Contribution margin per guest

Item

Costing

Total

Revenue (# of Guests x Price/Guest)

$1,100

$1,100

Operating cost



Meals


$ 50

Hotel

$105/1.8

$ 58

Total costs


$ 108




Contribution margin per guest

$1,100- $108

$ 992

The contribution margin per guest for Lallybroch Tour is $ 992, as computed in the table above.
The break-even analysis will show the number of units sold to cover the fixed and variable costs. In the Lallybroch Tour per guest for each tour, the break-even will be computed using the following formula:
Break-even analysis = Fixed cost/Contribution margin =$108/$992 = $0.11
Culloden Tour (5 days) Contribution margin per trip

Item

Costing

Total

Revenue (# of Guests x Price/Guest)

$1,600*30

$48,000

Operating cost



Transportation (fuel/maintenance)


$ 1,600

Guide Wages


$ 6,000

Total costs


$ 7,600




Contribution margin per trip

$48,000-$7,600

$40,400

The contribution margin per trip for Culloden Tour is $40,400, as computed in the table above.
Culloden Tour Contribution margin per guest

Item

Costing

Total

Revenue (# of Guests x Price/Guest)

$1,600

$1,600

Operating cost



Meals


$ 52

Hotel

$7.2/2.7

$ 3

Total costs


$ 55




Contribution margin per guest

$1,600- $55

$ 1,545

The contribution margin per guest for Culloden Tour is $ 1,545, as computed in the table above.
The break-even analysis will show the number of units sold to cover the fixed and variable costs. In the Culloden Tour per guest for each tour, the break-even will be computed using the following formula:
Break-even analysis = Fixed cost/Contribution margin =$55/$1545 = $0.04
Question 3
Trip comparison
To determine the profitability of each trip, the need to carry out an analysis to decide which trip is worth investing for 500 tourist guests.
The Culloden trip cost analysis for 500 tourist guests will be computed as follows:

Culloden trip


Culloden trip Tour (5 days)

Revenue (# of Guests x Price/Guest)

(500 x 100 x $1,600)

Guests x Price

$ 80,000,000.00

Operating Cost




Transportation (fuel/maintenance)

$1,600/trip

Cost/trip

$ 275,000.00

Meals

$50/guest
50*140*5*500

Cost/guest

$ 17,500,000.00

Hotel

$72/night

2.7 guests/room

$ 9,333,333.00

Guide Wages

$6,000/trip

Cost/trip

$ 750,000.00

Insurance


For the Year

$ 65,000.00

Depreciation on Tour buses


For the Year

$ 125,000.00

Administration Salaries


For the Year

$ 140,000.00

Advertising


For the Year

$ 185,000.00

Allocated Overhead


For the Year

$ 135,000.00

Total Cost



$ 28,508,333.00

Operating Income



$ 51,491,667





Number of Tours



100

Average Number of Guests/Trip



500

With the increase in the number of tourist guests from 30 to 500, the profit margin will increase. The profit from having 500 tourist guests is $51,491,667. To increase profitability, four areas need to be examined: cost reduction, turnover increment, increased productivity, and increased efficiency. In terms of cost reduction, the cost of hotel rooms, transportation, and meals should be reduced to increase profitability. The turnover increment will come as an increase of new tourist guests purchasing their tour packages; thus, they can increase profitability. Increased productivity will mean having systems and processe...