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"The Yorkshire Rose Hotel"
The beautiful city of York is the county town of Yorkshire and a favourite destination for tourists who visit York to see such attractions as the famous ‘York Minster’ Cathedral, the Jorvik Viking Centre, The National Railway Museum, or just to explore the medieval city walls and ‘The Shambles’ shopping street.
This picturesque city is also home to “The Yorkshire Rose Hotel” situated right in the city centre and popular with both business clients and visiting tourists. This mid-priced hotel has 40 letting rooms, and fine restaurant & bar, and a coffee shop on its frontage which is a popular stopping off point for tired shoppers.
You have recently graduated from Sheffield Hallam University with a 2.1 in Business Studies and are delighted to be starting your first full-time job as ‘Sales Development Manager’ at The Yorkshire Rose Hotel. However, as you find out on your first day, in this small business everyone (regardless of job title) is expected to turn their hand to whatever is asked of them. As soon as the Hotel’s General Manager realises that you studied ‘Financial Fluency’ at University she immediately ask for your help in tackling a series of issues facing the business !
The Yorkshire Rose Hotel is privately owned by a local property dealer who delegates the day to day running of the hotel to a General Manager (Anne Clayborn) who has been at the hotel for some years now. Whilst Anne is a very experienced hotelier she is (by her own admission) not that strong on the ‘numbers side’ of the business and has told you right at the outset that she wants you to produce a business report analysing several areas of the business that she doesn’t feel confident looking at.
The Yorkshire Rose Hotel (YRH) is owned and operated by a private limited company Yorkshire Rose Hotel Ltd (YRH Ltd), which is 100% owned by a local property dealer who takes no part in the day to day running of the company but instead delegates this to Anne Clayborn who was employed as the hotel’s General Manager some years ago. The Yorkshire Rose Hotel is the sole business interest held by and operated by YRH Ltd.
The hotel employs an in-house administrator to perform basic book-keeping tasks such as banking the daily takings, paying suppliers & staff, and producing some basic reports. This individual however has no financial expertise beyond what they have taught themselves whilst working at the hotel.
A local firm of Chartered Certified Accountants (ACCA) perform an annual audit on the hotel’s accounts, and prepare the final year-end accounts for submission to Companies House. They also deal with all Corporation Tax, VAT and PAYE (payroll) tax issues, but do not tend to get involved in any of the internal management accounting issues regarding the operation of the business.
The Yorkshire Rose Hotel has been a feature of York city centre for many decades. It is first and foremost a 40 bedroom hotel used by a mixture of independent travellers (making one-off bookings) and tour operators (making block bookings), in addition to business travellers (some of whom make their own bookings, and a number of larger businesses who book on behalf of their staff).
The hotel has a decent sized restaurant serving breakfast, lunch and dinner seven days per week to both hotel residents and walk-in guests. The restaurant has an adjacent bar area used for predinner drinks and also by conference and function guests.
The kitchen also provides food for the separate function suite which is used extensively by private guests (weddings, birthday parties etc.) and local businesses (conferences etc.).
Finally the hotel boasts a popular coffee bar which picks up lots of passing trade from tourists and shoppers in need of caffeine and somewhere to rest their legs !
During the first week of your new position as the Sales Development Manager of the Yorkshire Rose Hotel, Anne Clayborn asks you to look at a number of issues the hotel is facing, together with some of her ideas for the future. She supplies you with plenty of background information, and in addition over your first few weeks at the hotel you investigate all of these issues further yourself.
The end result of your coursework will be a business report which tackles each of these issues in turn. The following pages summarise your research notes which have been formulated from the various meetings you have had on each of these issues, together with additional information you have been able to ascertain. The final part of each research section is your summary of what you are required to include in your final report. The five areas are as follows :-
Reviewing a proposal to offer inclusive all-day guided tours around York city centre.
Calculation of the total costs associated with holding a 100 guest wedding function and thereby setting an appropriate selling price for this.
Analysing the operation of the coffee bar to understand why it failing to make the profit it is budgeted to make.
Evaluating whether the time has come to invest in the development of a fitness suite.
Formulating a financial plan for the coming year.
Although it is important to keep business reports as concise as possible, they must above all else be understandable to the final reader (in this case Anne Clayborn). Your report must therefore contain sufficient narrative to summarise the issue at hand, explain the analytical techniques used, the results derived, and provide clear justified recommendations where appropriate.
Your report should be presented in the EXACT order indicated over the following pages with all the information relating to each of the individual requirements (1a, 1b,1c etc.) being contained within just that section of your report (do not put information into appendices).
The assessment of each of the individual requirements will be allocated a mark somewhere within each classification range as follows :-
First (70%-100%) = Excellent computation, explanation & presentation etc.
2.1 (60% - 69%) = Good computation, explanation & presentation etc.
2.2 (50% - 59%) = Satisfactory computation, explanation & presentation etc.
3rd (40% - 49%) = Borderline computation, explanation & presentation etc.
Fail (0% - 39%) = Unsatisfactory computation, explanation & presentation etc.
The overall percentage weighting given to each of the individual requirements is indicated in [red square brackets] over the following pages.
Your final coursework mark is the weighted sum of all these individual marks.
Please note that merely presenting accurate ‘numbers’ will be unlikely to achieve a good pass (or possibly even a pass at all). Great emphasis is placed on your ability to be able to interpret your results and intelligently comment on them. Your report will be assessed on how well it informs the end-user to assist in the management decisions they need to make. This will require appropriate explanations and recommendations if the report is to be of use, and the marking will fully reflect how well you present your findings on each topic.
Remember that the intended reader of your report (Anne Clayborn) is not particularly financially astute (though she is clearly a capable operator). Your report must explain financial concepts in plain English that can be readily understood by an intelligent (though not financial) reader. Always aim to go one step further in your explanations by (for instance) stating the reasons behind your recommendations and the potential consequences of either accepting or not accepting the recommendations etc..
VAT may be completely ignored in all parts of this coursework.
There are several operators already offering sightseeing tours around York and the staff at the Yorkshire Rose Hotel are frequently recommending them to guests who enquire about the best way of seeing all of York’s attractions within a single day.
Anne Clayborn has previously considered whether the hotel should promote their own tours but has always shied away from pursuing this as an idea, because it is a little remote from her experience as a hotelier. Anne now wants you to carry out a feasibility study (just on paper at this stage) to establish the likely costs, selling price, and break-even point in terms of establishing the minimum number of guests on a particular tour.
The idea is to hire a minibus & driver (who doubles up as a guide) to take the often elderly guests around a series of York attractions over the course of a day (starting and finishing at the hotel). The guest would pay a single ticket price and this would include any relevant admissions and refreshments.
The proposed itinerary comprises of :-
After some research you have established that for regular group bookings you can negotiate the following discounted costs for each element of the itinerary (there are no entrance charges etc. for the
Minibus & Driver : Carries up to 20 passengers. Driver is also an accredited ‘Blue Badge’ tourist guide. Includes all fuel, parking & insurance etc.. : £200 per day flat fee
Jorvik Viking Centre : £7 per person admission
York Minster Cathedral : £5 per person admission
The Shambles & City Walls : Free admission
Lunch at Betty’s Tea Rooms : £11 per person
National Railway Museum : Free Admission
Castle Museum : £4 per person
Early River Cruise : £6 per person
Some basic market research had indicated that you could sell ‘all-inclusive’ tickets for £50 each.
a) [4%] Use the above information to calculate the contribution per person, and hence the net profit which would be generated from tours where either 10 or 15 or 20 tickets were sold.
b) [2%] Calculate the break-even number of ticket sales required for each sightseeing tour.
c) [2%] If Anne believes that you could probably sell 16 tickets per tour (and hence used this as the ongoing budgeted sales volume) what percentage margin of safety would this provide ?
d) [4%] During your discussions with Anne you pondered how ‘elastic’ the pricing might be. Anne was unfamiliar with this term and asked you to briefly explain it (possibly illustrating it with some ‘made up’ figures).
Aim to present your numerical work in largely tabular form in a manner which can be readily understood by the intended reader including explanations and recommendations as appropriate. Include sufficient narrative to make the report readable and understandable.
The Yorkshire Rose Hotel has always been a popular venue for conferences and functions and has a dedicated function suite which is typically used several times each month for various celebrations and meetings. The previous approach to setting prices for various functions has been to simply add up all of the variable costs incurred by each guest attending the function (staff, food , drink etc.) and to then add a percentage mark-up. However as you have explained to Anne this takes no account of the various indirect costs of the hotel which (to some extent) relate to the function suite.
You have advised Anne that the best way to take these into account is by introducing an Activity
Based Costing (ABC) System whereby:-
Anne has now asked you to implement such an ABC system, initially just focussing on using it to accurately cost out events in the function suite. She has provided details of a typical 100 person wedding reception so that you may ultimately compare your method of pricing such a function to the current (marginal) method.
After a significant amount of research you have identified that the operation of the function suite utilises (to a great or lesser extent) the following ‘activities’ (or other overheads) within the hotel:-
They estimate that ~20% of their time is devoted to the function suite
In the coming year the function suite is budgeted to host 150 separate functions.
Anne advises that at a typical Wedding Reception each guest would incur the following costs:-
In addition the following additional costs are also incurred:-
a) [4%] Using an Activity Based Costing approach determine the total overheads which should be absorbed by the function suite per annum, and hence per function. Your workings should be presented in a largely tabular format in a manner which clearly identifies the various activities, total overhead per activity, cost drivers, and workings leading to the proportion of that particular activities costs to be absorbed by the function suite; and which finally shows the total overhead per function to be absorbed.
b) [4%] Calculate the total costs incurred in hosting a 100 guest wedding reception. Your workings should be presented in a largely tabular format which clearly allows the reader to understand exactly how each element of cost has been derived. The table should end with a proposed selling price for a 100 guest wedding reception based on an 80% mark-up on total cost.
c) [6%] Explain and illustrate the pros and cons of the hotel’s current marginal costing methods with your proposed absorption costing method (numerical examples are not required). Explain to Anne why the total cost you have calculated is nearly £1,000 more than her previously calculated marginal cost and why this is so important.
The first thing which everyone comments on when they first visit the coffee bar is the gorgeous smell of fresh coffee beans being grounded by hand on the premises. Not only does the old manual coffee grinder offer a touch of theatre, it also adds authenticity to the ‘old-school’ product. If the customer wasn’t particularly thirsty when they arrived they certainly were once they saw and smelt what was on offer!
The coffee bar has always proved popular but has never made the level of profit that Anne had expected when she was first presented with forecast profitability figures by the company she originally purchased the coffee machine from many years ago. Anne has dug out the original ‘coffee profitability’ figures she was given and updated all the figures to current values. She also knows how many coffees she budgets to sell each month, and how many she actually does (together with all of the associated staff and material costs etc.)
Unfortunately what Anne does not know is exactly how to analyse all of this information to allow her to see exactly where the coffee bar is falling short of expectations and where it is doing well.
She asks for your help in understanding exactly what is going wrong and to make recommendations to help improve the profitability of the coffee bar, and provides you with the following information.
For simplicity it can be assumed that only one type of coffee is made and sold (in fact this is more true than people may at first realise. Most types of coffee whether they be Americanos,
Espressos, Lattes etc. are based on a single espresso shot of coffee!)
The hotel’s budget makes the following assumptions:-
Anne provides you with the actual sales figures and costs relating to one month’s trading in the coffee bar:-
a) [2%] In largely tabular form (including all relevant workings) show how much one standard cup of coffee should cost and hence how much profit contribution (£ and %) a single cup of coffee should make according to the Hotel’s budget.
b) [4%] By comparing the standard budget results anticipated for this product (see above), to the actual results for the example month, produce a table showing the revenues, various elements of cost and profit contribution for the month for :-
c) [6%] Using the results of the above (and additional calculations if necessary) clearly identify
(by name) and state the value of each of the following variances and sub-variances in turn :-
d) [2%] Produce a profit reconciliation statement which reconciles the original budget for the month, to the flexed budget for the month, to the actual results for the month
e) [6%] Then (largely in words) explain how each variance actually arose using the supplied figures to reconcile back to each of the previously calculated variances (i to vii above)
(e.g. using a completely different example “The average actual selling price of the widget was £10 as opposed to the standard selling price of £11.50. There were 220 widgets sold in the month and so the lost profit as a result of this reduced selling price (i.e. the ‘Sales Price Variance’) was : 220 x (£11.50 - £10.00) = £330 Adverse”)
One current omission from the Hotel’s facilities is that it does not currently boast any kind of fitness facilities. The Yorkshire Rose Hotel does however have plenty of spare space in a large ballroom which has stood unused for many years. There is sufficient space to set up a decent sized gym complete with a variety of exercise machines, in addition to a studio for aerobic and ‘boxercise’ classes, and a small spa facility comprising of steam & sauna rooms, and a spa pool.
The General Manager has already met with the Hotel’s regular builder who has quoted for the relatively modest structural alterations and decorating costs; and also a supplier of gym / spa equipment who has quoted for the correspondingly more expensive exercise equipment! The total costs are significant and it appears that the project would require an initial cash outflow of £650,000.
YRH Ltd’s Bank Manager has said that they would be willing in principle to provide a 5 year £650,000 bank loan for the money required at a 10% per annum fixed interest rate (= cost of capital) but that this was conditional on Anne producing a robust business plan for the proposal. Additionally, before Anne takes such a large proposal to the owner of YRH Ltd she wants to verify for herself that such a project would indeed be financially feasible !
The financial benefits of such a new facility would be that the Hotel’s ‘star rating’ would move up one notch which would justify a blanket increase in the room rates (albeit a modest one). Additionally non-residents could use the facilities either on payment of an entrance fee or by paying an annual subscription to become members of the YRH Fitness club.
Having helped Anne to put together both profit and cashflow forecasts for the project it is established that the new fitness suite is expected to produce the following additional cash inflows over the first five years (these do not include the original cash outlay required, nor any cash inflow from the equipment’s residual value at the end of its anticipated 5 year life) :-
£120,000 cash inflow
£160,000 cash inflow
£200,000 cash inflow
£220,000 cash inflow
The entire £650,000 capital cost of the project will be depreciated on a straight line basis over a 5 year period and it is anticipated that the second-hand equipment will be sold for £50,000 at the end of the five years. The average annual incremental profit from the fitness suite has been estimated at £60,000 per annum.
Using the above figures evaluate the proposed capital investment using the following four appraisal methods clearly explaining what each one shows, and the pros & cons of each method. a) [2%] Payback
b) [2%] Accounting Rate of Return (ARR) *
c) [4%] Net Present Value (NPV @ 10%)
d) [4%] Internal Rate of Return (use NPV @ 10% and NPV @ 20%)
e) [4%] Based on the results of the above provide firm recommendations (with reasons) on whether to invest or not.
f) [6%] During your discussions with Anne you mentioned that borrowing £650,000 would obviously increase the gearing * of the company. Anne did not understand what this meant and asked you explain what gearing is, how it is calculated, and the pros and cons of having low or high gearing (numerical calculations not required).
* Use the SHU “Financial Fluency” version of the ARR formula and definition of ‘gearing’
Sales are categorised into:-
Restaurant & Bar
Restaurant & Bar
* For the purpose of these budgets the above margins are calculated using a Cost of Sales figure that includes both the direct materials (e.g. food, drink, toiletries for rooms etc.) and direct labour costs (e.g. bar staff, kitchen staff, waiters, house-keeping etc.) But no overheads.
o The quarterly interest charge relates to the outstanding capital sum in the immediately preceding quarter. The interest rate is 12% per annum (fixed rate).
a) [4%] Produce a spreadsheet to show the quarterly loan repayments and quarterly loan interest paid over the next financial year.
b) [8%] Produce a tabular monthly budgeted Income Statement (using accruals concept) for YRH Ltd for the forthcoming financial year. The columns should correspond to the 12 months of the year plus a final Total column.
The rows should be exactly as follows:-
SALES & GROSS PROFIT
- Room Bookings
- Restaurant & Bar
- Coffee Bar
- Function Suite
Briefly comment on the key aspects of next year’s profit forecast. Explain how the accruals concept has affected the treatment of both items of sales revenue and items of expenses on this budgeted income statement (giving examples to illustrate both).
c) [12%] Produce a tabular monthly cashflow statement for YRH Ltd for the coming year. The columns should correspond to the 12 months of the financial year plus a final Total column. The rows for CASH INFLOWS and RECONCILIATION should be exactly as specified below.
Use own judgement for the layout of the CASH OUTFLOW section (but ensure that each individual cash outflow is listed separately and not aggregated)
Briefly comment on the key aspects of the cashflow forecast.
Compare the budgeted final Profit before Tax figure for the forthcoming year, to the budgeted Net Cashflow figure for the same year. List three significant ways in which they differ and (in general terms only) explain these. Numerical reconciliations are not required.
d) [8%] During your discussions with Anne you had mentioned that the working capital cycle of the business seemed over-long and how it might affect the business’s liquidity. Anne asked if you could explain exactly what you meant by ‘working capital’ , ‘liquidity’ and ‘the working capital cycle’ , and what actions (in general) a business could undertake in order to improve matters (numerical calculations not required)
The standard of presentation required is high. Marks are available to reward professionally presented work but these will not be awarded trivially.
In order to gain presentation marks your work should be structured, written and presented in a manner which facilitates rapid understanding of the issues and a clear explanation and justifications of your recommendations.
The requirements of your target audience should be considered, and a brief recap of any salient background might be appropriate. By contrast simply repeating ‘chunks’ of this brief will gain no credit and will result in lost presentation marks.
In the requirements section you will be given exact details of the work you are to complete and how each one is to be labelled and formatted. Please follow these instructions to the letter to ensure that you gain full credit for your work. We are asking for a lot of information. If you provide it in the wrong place, it may not receive credit! For this reason please do NOT put information in separate appendices. Keep every section self-contained!
A title page is required which includes your name, student number, seminar tutor, word count and Turnitin Originality score (which can be hand written in at the last moment).
Although in your future business careers you may well quite rightly include contents pages and either an end of report summary or an initial executive summary, these are not required for your FFFMDM coursework. Referencing
FFFMDM coursework tends to take the form of a business report or similar, as opposed to a piece of academic writing. You are therefore not required to reference your work.
If however you are quoting (say) a benchmark industry statistic (which the Marker may not be familiar with) you should informally state where you obtained the statistic from e.g. “The average gross profit margin for this industry sector is 65% [Mintel]”
Please ensure that your use of English, grammar and punctuation are at the highest level (spellchecker set to UK English not US English !). In the absence of a relevant Learning Contract incorrect use of ‘there’ & ‘their’ , or ‘to’ & ‘too’ etc. will be frowned on.
Keep sentences at the required length to make a single point. Don’t hesitate to simplify your phrasing by breaking down complex arguments in to a number of smaller sentences. You can test this by reading your work aloud (preferably in private !). We tend to breathe at the end of sentences, so if you find yourself running out of breath it probably shows that your sentences are too long !
The nature of your coursework and who the target reader will be, will dictate the style of your writing. Good business writing is clear and concise, and need not be overly formal. A mixture of
3rd person (and maybe occasional 1st person) is fine. For example if writing to your business Bank Manager you may state:-
“The sales are expected to achieve £10,000 per month by the end of the first year. The selling prices are calculated to deliver a 70% gross profit margin, though care must be taken to ensure that unnecessary discounting does not erode this. I have already discussed this issue with my Sales Manager”.
It is very difficult to completely effectively proof-read your own work as there is a tendency to read what you thought you wrote, not what you actually wrote. Returning to proof-read work over the following days can help to reduce this, as you will then actually read what is on the page and immediately spot silly omissions. Another reason to avoid complete your report against the final deadline!
There is a 2,500 (+/- 20%) word count (excluding any introductions, summaries, tables and their headings and appendices. However remember that the quality of your work is far more important than the quantity. You should aim to make your points as succinctly as possible but do not take this aim to extremes. You still need to properly introduce and explain topics, and justify your choice of methods and explain your methods. Just don’t waffle in the process!
Think carefully about the formatting of your work always remembering how important it is to make it as understandable and readable as possible. By way of guidance:-