Question

Asian Adventure Holidays offers a series of holiday packages aimed at families, seniors and corporate groups. The financial controller, Jack Tallis, is preparing for the annual board meeting and is concerned about the loss that the business sustained in the past year. He has examined the profits for each of the three departments of the business—family, seniors and corporate—and it seems that the corporate department is the source of the problem.

Jack has asked you to assist him to look more closely at the three packages offered by the corporate department to see which holiday packages are yielding profits and which are not. The three packages are to Thailand, Malaysia and Indonesia. The sales and direct costs of each corporate package for last year are as follows:

	Bali Adventure	Thailand Discovery	Malaysian Orienteering
Number of packages sold	10	20	10
Number of people per package	5	6	8
Revenue per person	$18 000	$12 000	$14 000
Direct cost per package:
Tour leader	$5 000	$12 000	$9 000
Tour assistant	2 000	3 000	6 000
Air travel	28 000	30 000	32 000
Accommodation	15 000	26 000	24 000
Equipment hire	4 000	0	9 000
Meals	18 000	15 000	8 000

To calculate the profitability of each package, a proportion of the overhead costs of running the corporate department needs to be allocated to the three packages. Jack has suggested that these costs could be allocated to each package in proportion to actual sales revenue. For last year these overhead costs were as follows:

Salaries	$200 000
Phone	2 000
Depreciation on equipment	5 000
Utilities	2 000
Rent and property taxes	9 000
Other department costs	12 000
Total	$230 000

Required:

1. Calculate the profit per package and the total profitability of each of the three corporate packages.

2. Compare the profitability of the three corporate packages.

3. Do you consider that the allocation of the corporate department overhead to packages using actual sales revenue is appropriate? Can you suggest a better method?

4. Suggest what actions the company could take in regard to the three corporate packages.

Answer 1

ASIAN ADVENTURE HOLIDAYS

1. PROFITABILITY ANALYSIS OF TOUR PACKAGES

	BALI ADVENTURE	THAILAND DISCOVERY	MALAYSIAN ORIENTEERING	TOTAL
NO OF TOUR PACKAGES(A)	10	20	10	40
NUMBER OF PEOPLE PER PACKAGE(B)	5	6	8	19
REVENUE PER PERSON(C)	$18000	$12000	$14000	I
REVENUE PER PACKAGE(P=C X B)	$90,000	$72,000	$112,000	$274,000
TOTAL SALES REVENUE(D=A X B X C)	$900,000	$1,440,000	$1,120,000	$3,460,000
DIRECT COSTS PER PACKAGE
TOUR LEADER	$ 5,000	$12,000	$9,000	$26,000
TOUR ASSISTANT	$2,000	$3,000	$6,000	$11,000
AIR TRAVEL	$28,000	$30,000	$32,000	$90,000
ACCOMODATION	$15,000	$26,000	$24,000	$65,000
EQUIPMENT HIRE	$4,000	$0	$9,000	$13,000
MEALS	$18,000	$15,000	$8,000	$41,000
TOTAL DIRECT COST PER PACKAGE(E)	$72,000	$86,000	$88,000	$246,000
TOTAL DIRECT COSTS (F=A X E)	$720,000	$1,720,000	$880,000	$3,320,000
ALLOCATED OVER HEAD EXPENSES* (G)	$59,827	$95,722	$74,451	$230,000
TOTAL COST(H=F+G)	$779,827	$1,815,722	$954,451	$3,550,000
PROFIT /(LOSS)(I=D-H)	$120,173	($375,722)	$165,549	($90,000)
RANK(BASED ON TOTALPROFIT)	2	3	1
ALLOCATED OVERHEAD PERPACKAGE (M)	$5983	$4,786	$7,445
PROFIT PER PACKAGE =(P-E-M)	$12017	($18786)	$16,555	$9786
PROFIT PER PACKAGE RANKING	2	3	1

*WORKINGS FOR ALLOCATION OF OVERHEAD IS GIVEN BELOW:-

PARTICULARS	BALI ADVENTURE	THAILAND DISCOVERY	MALASYAN ORIENTEERING	TOTAL
SALES REVENUE	$900,000	$1,440,000	$1,120,000	$3,460,000
PERCENTAGE OF TOTAL REVENUE(K)	26.01%	41.62%	32.37%
TOTAL OVERHEAD (L)	$230,000	$230,000	$230,000
ALLOCATED OVERHEAD=(G=K X L)	$59,827	$95722	$74,451	$230,000
ALLOCATED OVERHEAD PER PACKAGE(M=G/A	$5,983	$4,786	$7,445

2.COMPARISON OF PROFITABILITY

THAILAND DISCOVERY PACKAGE IS A LOSS WHEN CONSIDERED PACKAGE WISE AND IN TOTAL.THIS PACKAGE IS A LOSS EVEN BEFORE CONSIDERING OVERHEAD EXPENSES.MALAYSIAN ORIENTEERING IS MOST PROFITABLE.BALI ADVENTURE COMES SECOND

3.ALLOATION OF OVERHEADS ON SALES REVENUE IS NOT APPROPRIATE.BUT WE CAN ALLOCATE OVERHEAD HEAD EXPENSES ALSO USING NUMBER OF PACKAGES AND NUMBER OF PEOPLE.

4.As Thailand Discovery Package is making loss even before deducting overhead expenses,the package must be stoped .Other two packages are making profit .So more marketing can be done for other two packages