Profit-maximization is one of the core goals of any organization. For that reason, a feasibility analysis helps determine the status of the business. It can help illustrate the various strengths and weaknesses in a company thereby allowing for a clearer understanding of its position in the market. In the case in question, the Local Wildlife Trust is looking to increase its monthly income to about £3,000. The current cost incurred in running the trust is £5,000 which while each tourist costs the trust £8. The trust sells tickets at an average price of £12. With such figures, the aim is to consider various factors that could be manipulated to promote an increase in income while also making it easy for the trust to run its operations smoothly. Some of the potential target areas are such as a revision of the current pricing methods, competition, budgets, among others. In the event that the management evaluates some, but not limited to, the factors mentioned, the trust could experience a change in the positive direction.
Financials
As mentioned earlier, the trust operates on a budget of £5,000 per month whereby each tourist consumes about £8. Tickets are sold at an average price of £12 meaning that the trust earns a profit of £4 per tourist. It would be wrong to assume that the trust entertains 625 tourists every month. The figure is obtained following a division of the cost incurred per tourist with the overall fixed operational cost of £5,000. In finance, there are various costs some of which are hidden. For instance, the Trust could be spending more on staff training, resource purchasing alongside maintenance. The rationale for employee training is to ensure the trust anticipates receiving tourists from various geographical locations across the globe. The training would be focused on an assessment of the tourist demographics to determine the prevailing language spoken by tourists. Other potential costs could involve protection and restoration of biodiversity, purchase of animal feeds, and utility bills, among others. In the event that the cost per tourist rises to £10, it would mean even lesser revenue for the trust considering ticket sales remain the same at £12 per tourist. With the new cost per tourist, determination of the break-even point (BEP) is warranted.
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BEP = Fixed costs/ (Revenue per unit – Variable cost per unit)
BEP = £5000/ (£12 - £10)
BEP = £5000/£2
BEP = £2500
Based on the above calculation, the BEP stands at £2500 implying that despite a rise in the cost per tourist, ticket sales remain at £12.
In the event that the trust seeks to make a target surplus of £3,000 per month, the amount would be independent of the cost of operation. Thus, the assumption is that the £3,000 would be mainly profit generated from the sale of tickets. Assuming ticket sales remain at £12, the volume of the customers required would be target surplus divided by the difference between the price of one ticket sale and the cost per tourist. Thus, it would be,
£3000/£2 = 1500 tourists
Therefore, the trust would be required to attract 1500 tourists on a monthly basis to make a target surplus of £3,000.
Pricing Methods
One of the important factors that distinguishes one business from another is price. De Toni, Milan, Saciloto and Larentis (2017) explained that price is a key flexible element in an organization’s marketing mix and it interferes directly with both profitability and cost-effectiveness. Some of the pricing strategies mentioned are such as consumer-based, competition-based, and cost-based strategies. Of the three, customer-based focuses on creating value for the consumer, while the competition-based approach considers price levels alongside consumer behavior expectations to determine a particular price for products/services; lastly, cost-based involves a focus on adding the profit margin through calculating the unit and total costs ( De Toni, Milan, Saciloto and Larentis, 2017).
Among the three pricing strategies method, the trust would fare better with a cost-based approach. Based on the facts of the case, the Local Wildlife Trust has a high monthly operating cost. That being the case, there is a need to consider how profit generated helps cover a considerable portion of the costs incurred. Being in the wildlife industry implies that the Trust must adhere to certain quality standards to promote continued flow of tourists from various locations across the globe. Thus, the customer-value based approach is dismissed. For the Trust, the dominating issue are the costs incurred in maintaining or rather financing its operations. Hence, the cost-based pricing strategy could provide a firm foundation of determining tourists’ administration fees among other factors.
Factors affecting profit
Various factors could be affecting the Trust’s profit generating activities. A notable factor is the volatility of monthly operating costs. The protection and restoration of biodiversity could actually prove a financial burden on the Trust. Apart from that, the number of reserves coupled with the unique needs of each reserve could undermine profit generation and maximization (Gatti, 2018). Economic challenges such as poor or stunted economic growth in the region could determine the number of tourists visiting the Trust. In such a case, the Trust will be making just enough to remain operational. Additionally, there are social and environment challenges which could hinder access to the Trust. A harsh political climate can deter tourists from visiting leading to loss of a source of revenue. Furthermore, lack of sufficient governmental support when it comes to promotion and maintenance of biodiversity. Therefore, continued degradation of the environment following dominance of human activities could affect the Trust’s appeal to tourists. In summary, the said factors could damage the potential to generate profit for the Trust which could affect its existence. One ought also to consider that mismanagement of funds and resources can also affect profit generation significantly.
Management accounting
In any institution, management accounting plays a vital role such as through assisting in the decision-making process alongside planning, performance management systems implementation and provision of financial reporting skills (Gatti, 2018). There are various forms of management accounting information which can be used to help in decision-making. Some of the information involves financial forecasts, budgets, statements among others. A managerial accountant can use the said information to determine whether the company is making profit or whether are certain costs not recognized in the overall financial report of the organization. Putting the Trust into context, a financial statement could help provide valuable information pertaining to costs incurred in operations. The managerial accountant could focus on the disparity of variable costs and how they affect profit generation for the Trust. Furthermore, he or she could also use the Trust’s financial statement to determine whether there have been any fraudulent activities undermine efficiency of operations. The motivation for fraud could be due to the ever-changing competitive global environment (Almasan et al. 2016). That being the case, it is possible that the Trust could be under threat of fraudulent activities which could undermine its financial stability. Therefore, a rigorous assessment of the Trust’s financial statements could allow the managerial accountant to assess the various costs, both fixed and variable, in terms of how they affect business processes.
Decision-making
Decision-making plays a fundamental role in ensuring that an organization remains on track when it comes to meeting preset objectives. De Loo, Verstegen and Swagerman (2011) explained that managerial accountants are tasked with providing information on how to best design an organization’s financial function. With there being constant changes in the business environment, the role of managerial accountants cannot be understated. They help in not only internal analysis, but also risk management, two aspects which have become rather fundamental in an organization. Breuer, Frumusanu and Manciu (2015) noted that managerial accountants analyze information such as financial statements. After completing their analysis, they use the results to substantiate decisions, for instance, recommending that an organization cut down some costs to remain operational. Capital budgeting could also help in determining investments decisions. For instance, the Trust could, based on an assessment of its financial position and nature of the market, determine whether to solicit funding from investors or not. Such a decision could be made effective through integrating information acquired from the managerial accountant. The idea is to have the Trust focus on the factors that affect its operations considerably such that they undermine identification of a profit generating opportunity. Therefore, the role and value of the managerial accountant cannot be ignored.
Conclusion
The Local Wildlife Trust is operating at a rather tight budget and profit accrued is minimal. The major challenge for the Trust is the amount of money used to run its various operations which could range from maintaining the reserves, protecting animals, salaries, utilities, among others. However, a cost-based pricing strategy is likely to help determine tourist administration fees to counter the high cost of operation. Further, a managerial accounting perspective can help clarify how much money is used to run what operations for the Trust. With such information, the management will be better placed to determine, for instance, investment decisions, how much to charge tourists, among other outcomes.
Bibliography
Almasan, A., Circa, C., Zarzycka, E. and Dobroszek, J. (2016). Management accounting information from the perspective of managers: the case of Poland and Romania Selected findings of a survey research. Stowarzyszenie Księgowych w Polsce , 90(146), pp.41-64.
Breuer, A., Frumusanu, M. and Manciu, A. (2013). The role of management accounting in the decision-making process: Case study Caras Severin county. Annales Universitatis Apulensis Series Oeconomica, 15(2), pp. 355-366.
De Loo, I., Verstegen, B. and Swagerman, D. (2011). Understanding the roles of management accountants. European Business Review , 23(3), pp.287-313.
De Toni, D., Milan, G., Saciloto, E. and Larentis, F. (2017). Pricing strategies and levels and their impact on corporate profitability. Revista de Administraçã o , 52(2), pp.120-133.
Gatti, M. (2018). The Impact of Management Accounting Research: An Analysis of the Past and a Look at the Future. International Journal of Business and Management , 13(5), p.47.
