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Drini Inn Financial Analysis and Strategies

Drini Inn provides budget accommodation in Prizren, with a current net loss of €435,000 despite hosting up to 200 guests daily. The document outlines financial calculations for break-even points, return on investment, pricing strategies under capacity constraints, and considerations for temporary closure. Additionally, Alex Turner launched TurnerKits Ltd, focusing on replica football shirts, with analysis on product line decisions and labor constraints impacting profitability.

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5 views2 pages

Drini Inn Financial Analysis and Strategies

Drini Inn provides budget accommodation in Prizren, with a current net loss of €435,000 despite hosting up to 200 guests daily. The document outlines financial calculations for break-even points, return on investment, pricing strategies under capacity constraints, and considerations for temporary closure. Additionally, Alex Turner launched TurnerKits Ltd, focusing on replica football shirts, with analysis on product line decisions and labor constraints impacting profitability.

Uploaded by

vh7224
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Tutorial 4

1. Drini Inn – Budget Accommodation


Drini Inn offers affordable rooms for tourists visiting Prizren. The inn can host up to 200
guests per day and remains open for 350 days annually.

The initial investment in the property totals €1,350,000. A summary from its most recent
income statement is shown below:

Item Amount (€)


Income (€45 per guest per day) €945,000
Variable costs (food service, cleaning) €630,000
Fixed costs (salaries, maintenance) €750,000
Net Loss: €435,000

Out of the fixed costs, €610,000 is unavoidable, even if the inn shuts temporarily. However,
€140,000 per year (about €400 per day) could be saved by reducing staff levels during
closure periods.

Required:
1. Break-even point: Determine the minimum number of guests per day required for Drini
Inn to break even. (Assume each guest pays €45 per night.)

2. Target capacity for return on investment: Calculate the percentage of capacity that must
be used to achieve a 15% return on the €1,350,000 invested.

3. Target price under limited capacity: Suppose the inn can operate at a maximum of 70%
capacity throughout the year. Determine the price per guest per day needed to still achieve
a 15% return on capital. Assume variable cost remains €30 per guest.

4. Shutdown decision threshold: Calculate the minimum number of daily guests that makes
it worthwhile to stay open, using the price found in part (3). If occupancy falls below this
number, temporary closure may be preferable.

5. Qualitative considerations: List non-financial factors that management should take into
account before deciding on a temporary closure.

*Note: The income figures above represent averages, adjusted for seasonal discounts and
group rates.*
2. Alex Turner – Sports Apparel Business
Alex Turner, a retired footballer, struggled with coaching and media work after retiring. He
then launched TurnerKits Ltd, specializing in replica football shirts for five top teams.

The table below displays budgeted costs and revenues for February 2016 (in £ per unit,
except output volume). Production equals sales.

Club Redchester North Mersey FC Westbridge Foxborough


London
Selling price 70 65 60 60 55
Raw 16 14 15 18 18
materials
Direct 2.50 2.50 2.00 2.00 2.50
labour
(£10/hr)
Royalties 20 20 20 20 20
Variable 5.50 6.50 5.00 5.00 6.50
overheads
Fixed 10 10 10 10 10
overhead
Profit/(loss) 16 12 8 5 (2)
per unit
Units 6,000 6,500 5,500 6,500 4,500
produced
and sold
Royalties are paid at £20 per shirt produced and sold.

Required:
a) Product line decision: A manager proposes discontinuing the Foxborough shirt since it
shows a £2 loss per unit. However, Alex played for Foxborough and wants to keep it. From a
management accounting perspective, recommend whether to keep or drop the product.
Support your reasoning with calculations.

b) Labour constraint analysis: Suppose that due to staff illness, only 80% of the normal
labour hours are available in February. Determine the optimal short-term production mix
and compute the maximum profit that can be achieved under this constraint.

c) Long-term strategies: Suggest potential long-term solutions to mitigate the impact of


recurring labour shortages on production capacity.

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