Free Accounting Dissertations - So Increase In Inflation During The Year Would Decrease Net Profits And
So increase in inflation during the year would decrease net profits and similarly decrease in inflation during the year would increase net profits.
Ferry operators are experiencing more competition. Since they have already incurred fixed costs in acquiring ferries, any additional revenue would generate contribution and profits for them. We expect prices to decrease by 2% in 2006. 2% decrease in ferry costs would increase contribution and profits by £15,250.
Accommodation costs will vary due to two things expected increase in Danish Kroner costs and change in Sterling to Danish Kroner currency rate. Since UK and Denmark are both in Europe, real interest rates are expected to be same. Only inflation will change the currency rates. Kroner accommodation costs are expected to go up by 6% and Denmark’s inflation would be around same. As Denmark’s inflation rate is higher than UK’s expected inflation rate, Sterling will strengthen more. So 2006 currency rates are calculated by Sterling : Danish Kroner = 10.6*(1+0.06)/(1+0.025) = 11.0
Other administration costs are only expected to increase in July 2006 only. The costs increase will reduce profit by £7,450. This amount is only 3.4 % of net profits expected in 2006 and hence is not a very big factor. Similarly 1% increase in salaries would reduce profits by £1,000 per year.
Inflation rate will have a big impact on sundry costs. 1 % increase in inflation will decrease profits by £8,080. Sundry costs cover a lot of general expenses and are expected to increase at almost inflation rate. Danish Holidays can’t control inflation but may benefit from tying some of the sundry costs in the beginning of the year.
Quarterly performance
At higher price levels, all quarters will have significant contribution in 2006. Q4 is expected to produce lowest contribution, but even that is £145,000. Now if we look at fixed costs, Danish Holidays will incur depreciation even if company doesn’t sell any packages in that quarter. Sundry fixed costs are also expected to remain same even if company doesn’t sell any packages.
Danish Holidays can save some salary costs if it decides not to sell packages in one quarter. But the amount will be minimal as customers book packages all round the year. It is not like that customers book packages in quarter in which they want to travel. If company doesn’t operate in Q4, it may hamper sale of packages in Q1 to Q3 because people like to book holidays much in advance. Plus if it hires people for only nine months as compared to one year, employees will ask for higher monthly salaries. In light of above, it doesn’t make sense for Danish Holidays to close its business for any quarter. As contribution is positive in all quarters, and even some reduction in selling packages won’t make quarterly contribution negative.
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