Evaluate break-even evidence, contribution, margin of safety and risk to justify decisions in IB Business Management HL cases.
Matchpoint Tennis Club (MTC)
Matchpoint Tennis Club (MTC) is a famous members-only club. MTC owns tennis courts, changing rooms and a restaurant. The majority of members are between 30 and 50 years old. Most members have high incomes and successful careers. However, MTC faces increasing competition from Best Sports, a multinational provider of sports centres. An economic downturn has also reduced MTC 's profits. Until recently, the restaurant made a valuable contribution to fixed costs but this has fallen significantly in the last 12 months.
Last year, Seb, a former successful tennis player, became the new Managing Director of MTC. With the objective to increase revenue, he wrote a five-year plan with the following strategies:
- double membership of MTC
- open the restaurant to the general public
- open a sports equipment and clothes shop under the family brand "Matchpoint"
- employ professional tennis coaches (teachers).
Tina, the Marketing Director, agreed with Seb about the strategies. In order to achieve the first strategic objective (double membership), she prepared a marketing budget and proposed the following tactics:
- overall reduction in membership fees of 10 %
- discounts for people aged below 18 and over 60 years old
- advertisements in local newspapers and on social networking sites
- a new range of club branded merchandise such as T-shirts and coffee mugs.
Alex, the Human Resources (HR) Manager is concerned about the impact the five-year plan will have on employees. Employees already argue that they work too hard for low pay. An increase in the number of members would increase their workload and responsibilities further. Alex tried to convince Seb that membership of MTC was already at saturation point on the product life cycle and that existing members would not like some of the proposed changes to the club.
Alex also stated that since Seb joined the business last year, the friendly atmosphere at the tennis club has disappeared. That atmosphere has been replaced with a focus solely on profit making. Alex would prefer a focus on providing a good quality service for existing members.
Define the following terms:
contribution to fixed costs.
Creative Toys (CT)
Creative Toys (CT) manufactures toys and markets them business-to-customers (B2C) online only. The business operates in a leased industrial site and relies on word-of-mouth promotion only. To make customers believe that CTs toys are better than its competitors, CT sets prices slightly higher than the competition. Production and sales are mostly between 1 October and 24 December. Most of the employees work on temporary contracts during this busy period. For the remainder of the year, CT operates well below capacity utilization.
Table 1 contains selected data for CT, for 2014:
Table 1
In 2014, the management of CT considered a change of the marketing mix to include above the line promotion, lower prices, and an additional sales method called "toy parties". Toy parties would be hosted by newly recruited CT sales representatives and attended by parents and their children. At the parties parents could see the toys and children could play with them. Sales would be made at the parties by the new sales representatives, who would be paid on a commission-only basis.
Toy parties could be held throughout the year and make CTs total sales less seasonal. Based on market research, management has estimated that the parents' demand for toys is price elastic and is planning to set lower prices for all toys sold online and at toy parties. The management has prepared forecasted financial data for CT, for 2015, based upon the proposed change to the marketing mix, shown in Table 2 below.
Table 2
The Finance Manager will carry out a variance analysis in order to determine whether the proposed change to the marketing mix has been successful.
Using information from Table 1:
calculate the break-even level of output for CT, for 2014 (show all your working);
construct to scale a fully labelled break-even chart for CT, for 2014.
Himalayan Trekking
Himalayan Trekking (HT) is a trekking (mountain walking) agency based in Nepal. It has been operating guided treks for tourists in Nepal, Tibet and Bhutan for over 20 years. With a duration of between one and three weeks, HT offerings include treks to the Everest Base Camp, tours to Buddhist sites in Tibet, and treks even to the inaccessible Kingdom of Bhutan. Brand loyalty is very strong, with repeat bookings from many clients (trekkers).
The market for trekking has been growing very rapidly with many new businesses setting up to meet the increased demand for "adventure" holidays. In this competitive market, HT's unique selling proposition (USP) is to provide an unforgettable wilderness experience in a socially and ethically responsible manner. It only uses locally produced food and local guides and trekkers camp without wasting too many resources. All clients have to sign a contract to agree that they will act in a socially responsible manner throughout the trek. Though it always had a strong sense of social responsibility, HT had not promoted this aspect of the business until the management realized that changes in attitudes towards social responsibility could be used to gain competitive advantage.
HT's brochure states that:
- It is a market leader in adventure tourism for Nepal, Tibet and Bhutan. It caters to a wide range of clients from experienced to inexperienced trekkers.
- In recognition of protecting the fragile environment, economic systems and cultures it treks in, HT has been awarded a global quality standard.
- By employing local guides and using locally produced food, HT adds much value to the local region.
- It only employs staff that have previous social and environmental experience.
- It financially supports a non-governmental organization (NGO) for Nepali orphans by giving 5 % of its turnover to Child Environment Nepal (CEN).
Selected financial information for HT for 2013:
Calculate how many clients (trekkers) HT would need to meet its target profit figure of $400 000 per year (show all your working).
Using the financial information provided, prepare a fully labelled break-even chart for HT for 2013.
In 2014, the following changes occurred:
- annual fixed costs increased by 20 %
- rising fuel costs of flights increased average variable costs by 40 % per trekker.
The average price charged per trekker remained the same as did the number of clients (300).
Taking these changes into account, calculate the new break-even quantity and margin of safety for HT in 2014 (show all your working).
Explain one possible response from HT to the change in the break-even quantity and margin of safety calculated in part (i).
