Accounting in Decision Making Assignment Help – Sample Solution
Introduction
The objective of any organization is to maximize profit, the survival of a firm is dependent upon inflow of resources at a bare minimum of the outflows, analysis of such decisions helps allocate resources in an effective manner to obtain the desired result for the organization, the internal accounting system which serves an essential purpose for the organization which is to provide the knowledge for planning and making decisions on the project (Zimmerman, 2010). Crystal Hotel is planning to renovate and refurbish the hotel and open a Wellness Center on the rooftop, an analysis was taken upon to conclude whether or not this project will be beneficial in improving the overall image of the hotel and bringing out additional customers to it. The Wellness Center project and the options presented are to be analyzed to obtain the desired result for the success of the project. The first analysis to be done is of either to purchase equipment or to have it on a rental basis (yearly, half-yearly, or quarterly) with a maximum budget of $51,000. Secondly, the idea of membership for external clients is to be explored followed by the analysis of promotional activity for the opening of the wellness center and for boosting the occupancy rate of the hotel. This analysis will help evaluate the importance of financial data like accounting concepts, costing techniques, budgeting techniques, and capital budgeting techniques in assisting the business for decision making.
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Sales and Marketing Department
The Sales and Marketing department is overseen by The General Manager like many other departments, with Sales which is the lifeblood of any organization and marketing which assist sales by promoting the business and is involved in creating an efficient promotional budget. It is primarily the most important function in an organization as other functions are restricted to support and involved in the process of saving money whereas sales and marketing are involved in the inflow of the resources by the expansion of the business. The recent decision of the management to renovate and refurbish has given the opportunity to the sales and marketing team to enhance the growth of the business by incorporating new ideas and executing them to obtain the desired result of the expansion of the clientele and business opportunity. The wellness project which plans to build a small gym on the rooftop some basic business decisions are to be taken after analysis.
Equipment
For the small gym to operate there is a requirement of (4) Treadmill, (3) Elliptical Trainer, (5) Exercise Bike, and (2) Rowing Machine. To make a decision to rent or buy the equipment is to be done in an analysis based on the fundamental law of finance that a dollar today is worth more than a dollar tomorrow. The opportunity cost of both alternatives for acquiring resources can be analyzed to understand the safest option for the organization to opt for terms of the cost of the whole life equipment (Zimmerman, 2010). The organization invests in an asset to obtain benefits from its service over time, the decision is taken whichever alternate has a lower amount of acquisition for the life of equipment if both the options provide similar services (Johnson & Lewellen, 1972). The given budget is $51,000 and the analysis is to be done for the cost period of three years which is the life of the equipment, In the buying option the cost of all the machines is $58,457 where the residual value is 20% of the cost which will be received after three years $11,691.4 though this may be the amount which we will receive at that given time, the value of it in terms of today is not a true representation we will discount the residual value by 7% bringing the residual value at $9,543.66 which is what it would be worth today. Adding the servicing cost which is a total of $1,753.71, bringing the total cost of all equipment over a period of three years to $50,667.05 which falls under the desired budget. Counter to this option of buying the equipment there are multiple rental options which all increase by 10% annually and are to be paid at the beginning of the period, the rental option of 3 months which has the highest cost over the period of three years amounting to $74,855, the rental option of 6 months amounts up to $59,306, the lowest cost option is the annual rental option which has a total amount of equipment at $51,883.85. The buying option is a better option for an organization as the assets are reflected as resources whereas leasing them would increase the expenses and have a negative impact on the financial books. The advantage of leasing a piece of equipment is that maintenance and residual life are hassles for lessee whereas in the buying option all responsibilities are on the organization and it could also be left with an obsolescence product before its life cycle ends apart from these general advantages and disadvantages the most essential factor is the cost of it. The analysis shows that the lowest cost for treadmill and rowing machines comes from the buying option which is $20,999.39 and $4,725.47 respectively, Whereas, Elliptical trainer and Exercise bikes would be much cheaper if the option of annual rent is taken amounting to $9,056.12 and 13,509.47 respectively saving the organization $2376.60 if all the lowest option are to be taken as compared to only buying option Bringing a total cost of equipment to be $48,290.45 over the period of three years. To obtain all the desired equipment under the budget and saving up to $2,709.55 from the budget reflects an efficient and effective decision-making process.
Membership
The idea of creating a membership which would bring the footfall of external visitors by providing two types of memberships a basic one where all the facilities are included and a full package where there are hourly sessions available with the dietician and personal trainer. To market this idea an initial investment of $ 53,373 will be required and a constant expense afterward to keep the promotional activities for this membership idea. When analyzing any project if the net present value (NPV) is positive the project is to be accepted which is the difference between the present value of cash inflows and the present value of cash outflows (Zimmerman, 2010). The NPV for promoting membership to external clients stands at $80,145.46 for the period of 3 years after taxes keeping in consideration that the cost of capital is 7% which is the required rate of return for the organization. This proves to be a positive project which would bring a positive stream of cash flow for the future it would be beneficial for the organization to open membership to external clients with these two types of membership programs.
Promotion for Wellness Center Opening
The nature of the product to be promoted is based locally that is why traditional marketing methods are to be used which is also outbound marketing (Todor, 2016). The objective here is to promote the opening of wellness center where an event is already being held, the attention for people has to be obtained through various marketing methods to obtain the most impactful mix from the given options. The budget of $12,000 is allocated for the promotional activities for opening, around 50% of this budget is to be spent on two Digital Medium Billboard due to the fact that advertising through billboards attracts and involves customer interaction which is more effective, and their recall is proved to be more after interacting with a digital billboard (Schönböck, et al., 2008). The billboard gathers and attracts the attention of the customer (Balkafl, Akbulut, & Kartopu, 2005). Billboards also have the lowest cost when it comes to impressions compared to other media and promotional types (“Why Billboards : Meadow Outdoor”, 2019). It gives a prior advantage when it comes to promoting the event due to the fact that the digital billboards will be active and running for 4 weeks before the opening creating a massive targeted promotion for the Paramatta Metropolitan Area. A Quarter page strip costing $1,245 of advertisement is also be presented a day earlier before the launch to hammer the customer, the aim of using the newspaper medium is to not gain or attract customers, the objective is to stay visible and be a reminder for the day of the event for many customers who have been influenced by the billboards activity. Four Shelter Posters which would cost up to $3,146 are to be put up for a week before the opening which provides an organized backlit for 24 hours visibility to both the pedestrians and the vehicles in the desired area (Lichtenthal, Yadav & Donthu, 2006). Four Digital foyers which costs up to $1,386 are also to be used in Cinemas prior to the opening for a week in the metropolitan area, to target the population which is close by the area, the foyers work as a hammer for the consumer awareness in nailing down the message with the assistance of other marketing activities. 1000 Two-sided A6 Flyers are to be designed and distributed in the area 2 days before the opening to reach the potential customers directly which would cost a total $711.70. The options which are selected are taken on the basis of the nature of the message and the target market to have the maximum impact on the consumer to obtain a massive turnout for the opening event. A total of $11,988.90 is to be spent on the promotions for the opening day of the wellness center.
Promotion for Boosting Occupancy
The cost-volume-profit analysis can be done after the costs are classified as fixed, variable or semi-variable, which helps identify the effect of sales volume and cost of the unit on the operating profit (Zimmerman, 2010). The management has decided to charge $120 per person for the night’s accommodation and the cost which is classified as the variable is $35. Contribution margin shows the incremental profit obtained by the organization for each unit sold by taking the difference of price of the product and variable cost if contribution margin is positive it has some basis for futher analysis and can prove to be profitable for the company (Bragg, 2019). For every person taking accommodation in the hotel, its earning will increase by $85. Contribution margin, on the other hand, shows the percentage of revenue which can cover the fixed cost or the desired profit of the company (AccountingCoach, 2019). The CMR is 71% which is an indication that 71% of the contribution will be available to cover the fixed cost of $40,000. If the hotel is able to serve 471 customers for a single nights accommodation it will cover all the cost it has incurred achieving the breakeven point which in terms of the dollar has to make a sale of $56,470.59 to obtain break-even. where it is standing on no profit no loss, the moment the hotel serve 472 customer the $85 will be added in the profit stream of the hotel. To obtain a profit of $150,000 hotel has to serve around 2,235 customers. The occupancy rate for the hotel on any given night is 70% which means out of 100 rooms 70 are occupied, given the situation if the rates are to be raised by $30 and taken up to $150, the CM will increase to be at $105 with 77% of contribution ratio towards the fixed cost or profit breakeven can also be achieved at 348 customers and the target profit can be achieved by serving 1,652 customers. Looking at the occupancy rate the increased price of the hotel with the added promotion of wellness center will contribute highly toward the profitability of the hotel and can be totally justifiable with the provided services to the customer.
Conclusion
The Wellness center for Crystal Hotel Pty is a profitable addition to the services of the hotel, with the idea that membership program is initiated to the external clients the hotel can boosts it footfall massively and create diversification in the services provided to the customers. The wellness center will contribute towards attracting business opportunities and expansion of the core services provided by the hotel. The anlysis has shown that this addition to the hotel will be highly profitable the with low initial cost, given that the organization has cashflows to invest in this renovation and refurbishment. Equipment is to be bought and rented out as per the analysis purely on the basis of cost-saving, whereas, external membership proves to be a profitable prospect in many ways, different traditional marketing activities are to be taken up to promote the opening of the wellness center and the hotel prices are to be increased for added profitability with added services. Overall the idea of opening a wellness center is to be initiated for the increasing profitability of the hotel.
Recommendations
The equipment which currently has only two options to be acquired can be sought for financing saving the initial cost also there are many hiring options which different alternatives. The membership types can be increased to have further basic activities like Gym only, Sauna only to attract more customer making it pocket-friendly for everyone. To promote the opening of the wellness center platforms of digital marketing can be taken up which provides higher results as compared to traditional activities. Hotel occupants can have exclusive timings for wellness to avoid any high traffictime. Additional services can be added in the wellness center to attract more customers.
References
AccountingCoach. (2019). contribution margin ratio definition and meaning | AccountingCoach. Retrieved 18 August 2019, from https://www.accountingcoach.com/blog/what-is-the-contribution-margin-ratio
Balkafl, E. E., Akbulut, N. T., & Kartopu, E. (2005). An evaluative study of billboard advertisement’s attention-perception and design criteria. In Proceeding of the 3rd International Symposium of Interactive Media Design (pp. 1-5).
Bragg, S. (2019). Contribution margin — AccountingTools. Retrieved 18 August 2019, from https://www.accountingtools.com/articles/2017/5/16/contribution-margin
Johnson, R., & Lewellen, W. (1972). ANALYSIS OF THE LEASE-OR-BUY DECISION. The Journal Of Finance, 27(4), 815-823. doi: 10.1111/j.1540-6261.1972.tb01313.x
Lichtenthal, J., Yadav, V., & Donthu, N. (2006). Outdoor advertising for business markets. Industrial Marketing Management, 35(2), 236-247. doi: 10.1016/j.indmarman.2005.02.006
Schönböck, J., König, F., Kotsis, G., Gruber, D., Zaim, E., & Schmidt, A. (2008). MirrorBoard-An Interactive Billboard. In Mensch & Computer (pp. 217-226).
Todor, R. D. (2016). Blending traditional and digital marketing. Bulletin of the Transilvania University of Brasov. Economic Sciences. Series V, 9(1), 51.
Why Billboards : Meadow Outdoor. (2019). Retrieved 18 August 2019, from http://www.meadowoutdoor.com/why-billboards
Zimmerman, J. (2010). Accounting for decision making and control (7th ed.). McGraw-Hill/Irwin.
