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Accounting Essays | Danish Holidays

Danish Holidays is a travel company specialising in selling holidays in Denmark to UK market. A.

A. Profit & loss Account 2005 1.

1. Appendix I shows the data used in the preparation of the profit & loss accounts for the year 2005. Danish Holidays sold a total of 9900 packages in 2005. 2.

2. Contribution is sales minus variable costs associated with sales. Danish Holidays has four variable costs - commission paid to agents, ferry crossings, accommodation costs in Denmark and other administration costs.

Danish Holidays pays 5% commission to agents. Higher the price per holiday, higher would be commission but so would be the remaining 95% of price. So higher sales price per person would lead to both higher commissions paid to agent and contribution per person.

Ferry crossings costs per person also vary with seasons with lowest costs of £51 in Q1 and Q4 and highest costs of £91 in Q3. If sales price per holiday were fixed, then higher ferry crossings costs would lead to lower contribution.

Like ferry crossings costs, accommodation costs also vary with seasons. Accommodation costs were given in Danish Kroner and a constant Danish Kroner to Sterling rate of 10.6:1 was used to convert them into Sterling.

Other administration costs were fixed at £20 per person. Any increase or decrease in sales price would lead to same change in contribution per person. 3.

3. Appendix II shows the contribution per person for four quarters.

Commission costs per person at £12.1 were lowest in Q4 and were highest at £22.6 in Q2. This was due to lowest and highest cost per person in Q2 and Q4 respectively. Contribution after commission costs only was highest in Q2 and lowest in Q4.

Contribution after commission costs and ferry crossings was highest in Q2 at £357.5 and lowest in Q4 at £178. Also the gap between Q2 and Q3 contribution has increased due to higher ferry costs in Q3.

After deducting accommodation costs, the highest and lowest contribution is still achieved in Q2 and Q4 respectively. But the second and third positions were reversed. Now Q1 has second highest contribution per person due to much higher accommodation costs in Q3.

The contribution pattern didn't change after deducting other administration costs as they were fixed at £20 per person.

Contribution per person was highest in Q2 at £183.5 and lowest in Q4 at £22.1 - Q2 contribution per person was more than eight times that of Q4. Contribution per person was £101.7 and £60.3 in Q1 and Q3 respectively. 4.

4. Appendix III shows total contribution per quarter and also the annual total. a.

a. Its revenues are dependent on two things - number of packages sold and the price of each package. Like most of the travel agencies, Danish Holidays' revenues fluctuate significantly with seasons. Both price and number of packages sold vary with seasons. Q3 had highest sales at £1,837,700 and Q1 had lowest sales at £361,200. Danish Holidays sold about 300% more holidays in Q3 as compared to Q1 and at a price which was 30% higher. b.

b. Variable costs were highest in Q3 and about seven times more than those in Q1. Total variable costs were 77.9% of total sales. It ranged from 59.3% in Q2 to 90.8% in Q4. c.

c. Even though Q3 had highest sales, highest contribution was recorded in Q2. Q2 contribution was £330,277.9, £47,049.7 higher than that in Q3. Contribution was lowest in Q4 at only £48,622.1. d.

d. Total annual contribution in the year 2005 was £784,219.2. Q2 and Q3 contributed 42.1% and 36.1% of annual total, i.e., more than three-fourths of annual contribution comes in a period of six months only. 5.

Net profit/(loss) for 2005 Danish Holidays suffered a loss of £287,780.8 in the year 2005. The contribution turned into a net loss due to high fixed costs of £1,072,000 for the year. Danish Holidays would have made net profit only if the contribution was more than the fixed annual costs.

5. The net loss was 8.1% of annual sales. B.

B. Budget for year 2006 1.

1. Budget for year 2006 uses 2005 profit and loss accounts as a base to start with. Appendix IV shows the assumptions used in preparing budget for the year 2006 and the per person change in different cost elements. The commission paid to travel agents is still assumed to be 5% of the sales price per person. Depreciation is also constant at £164,000 per year. 2.

2. Increase in inflation will affect wages and sundry costs. We expect inflation to rise by 2.5% in 2006. 3.

3. Following categories of cost elements are expected to change during the year. a.

a. Ferry costs per person are expected to reduce by 2%. Since ferry costs were highest in Q3, the maximum absolute gain in contribution due to lower ferry costs would be observed in Q3. Q3 ferry costs per person would be £1.8 lesser in 2006 than in Q3 of 2005. b.

b. Accommodation costs in Danish Kroner are expected to increase by 6% in 2006. Appendix IV shows the expected accommodation prices per person for each quarter in 2006. Accommodation costs in UK Sterling are dependent on Sterling to Danish Kroner conversion rate. We have used 11:1 conversion rate for the year 2006. Per person accommodation costs in Sterling would increase by highest £4.3 in Q3. The rise has been curtailed due to the expected appreciation of Sterling against Danish Kroner. Due to different inflation rates in UK and Denmark, the conversion rate will move to neutralise the effect of inflation rates. c.

c. Other administration costs are only expected to increase by 5% from 1st July 2006. Other administration costs would increase by £1 per person for quarters Q3 and Q4. d.

d. Salaries are expected to go up at rate equal to inflation rate. Assuming an inflation rate of 2.5%, the total annual salary bill in the year 2006 would be £102,500 - an increase of £2,500 over the year 2005. e.

e. Sundry costs are also expected to rise by the same rate as inflation. Sundry costs for the year 2006 are expected to be £828,200, an increase of £20,200 over the year 2005. 4.

4. Budget at 2005 package price levels a.

a. Appendix V shows the quarterly and annual budget if package prices are kept constant at 2005 levels. b.

b. Sales have increased by £162,000 in the year 2006 due to expected increase in number of tourists taking Danish Holidays packages. c.

c. Total expected variable costs are going to increase by £168,858 in the year 2006. Since the increase in variable costs is more than the increase in sales, overall contribution is going to decrease. Total contribution is expected to be £777,961.2 in the year 2006. d.

d. Total expected fixed costs for the year 2006 would be £1,094,700, an increase of £22,700 over the year 2005. This increase will further increase the net loss in the year 2006. e.

e. Expected net loss for the year 2006 is £316,738.8, an increase of £28,958 over the year 2005. Expected net loss is 8.6% of the expected sales in the year 2006. f.

f. So if Danish Holidays uses the same package prices per person in 2006, its loss would increase. The company would have to revise its sales price structure to earn a profit in 2006.