Reference no: EM132613161

AF5108 Accounting For Managers - The Hong Kong Polytechnic University

QUESTION 1

Acrux Group is a multidivisional business established in Hong Kong since the 1980s. The firm has two major subsidiaries: Plunkett Hotels and Resorts, and Honshu Properties.

Plunkett Hotels and Resorts is a five-star resort with presence in major tourist destinations across Asia-Pacific and Australia. Guests pay an all-inclusive flat rate to enjoy all the services offered by the resort, which includes accommodation, food and beverages, spa and sauna, and a variety of sport activities organized by the fitness club. Each service is organized as a department for management purposes. Due to its excellence services, Plunkett has received numerous awards in the past and it has been expanded from a single resort hotel to 15 resort hotels.

The General Manager in each Plunkett's resort is treated as a profit centre, and their annual bonuses is determined based on the difference between actual as compared to the budgeted profit at year end. In the past, Plunkett's annual budget is based on the projected occupancy rate and expected costs. The annual budget will then be divided into monthly budgets based on the number of days in the month and seasonal demand fluctuations.

During the middle of 2017, Plunkett has changed it's CFO and she felt that the old budgeting approach does consider the dynamic nature of the tourism market (The peak season for most of the Plunkett's resort hotels are in the months of January, July, August and December). To ensure the budget reflects the most updated demand and cost information, she adopts the rolling budget approach starting from 2018 fiscal year. Before the fiscal year begins, the head office sets the target, for each resort, the variable cost per room occupied for each department (i.e. accommodation, food and beverage, spa, and fitness club), along with the fixed costs target on these departments for the entire year. Each department's annual fixed cost target will then be divided into monthly targets based on the number of days.

Under the new budgeting approach, the General Manager of Plunkett's resort is evaluated using the flexible budget. Bonuses are determined based on the difference between budgeted and actual expenditures.

The following illustrates the new budget model for Plunkett to be adopted in 2018 for its Penang resort:

After the adoption of the new budgeting system, occupancy rate for Penang resort from January to August are 80%, 75%, 77%, 70%, 67%, 64%, 67%, 70% respectively.

Another subsidiary of Acrux Group is Honshu Properties. Honshu operates as a property development business. It mainly owns and operates service apartments in the Asia Pacific region. Unlike Plunkett Hotels and Resorts, the General Manager of Honshu Properties is evaluated as an investment centre. Specifically, the general manager of Honshu is rewarded based on its pre-tax return on assets (ROA). Thus, the higher its pretax ROA, the more bonus the general manager will enjoy. Currently, Honshu is considering acquiring a new apartment complex in Thailand known as Havana Peak with the following information:

Expected revenue $16.6 million Expected operating expenses $12.59 million Asset value $20 million

The following are the latest financial information for Honshu in 2018:
Sales $86.5 million
Operating expenses $69.7 million Total assets $64 million

Acrux estimated that Honshu's minimum rate of return is 15%.
Required:
a. Determine Plunkett Hotel and Resorts breakeven occupancy rate per day.
b. Using the old budgeting system, prepare the August, 2018 budget to determine the budgeted profit for the Penang resort (Hint: follow the daily budget illustration for the Penang budget).
c. Prepare a report to evaluate Penang resort's performance under the new budgeting system for August 2018. Briefly comment on the General Manager's of Penang resort's performance.
d. After the adoption of the new budgeting system, almost all other hotels in the Plunkett Hotel and Resorts exhibit occupancy rates trend like the Penang resort. In fact, they share similar performance trend as in part (c). Discuss possible explanations for such observation.
e. Determine Honshu's ROA in 2018.
f. Based on the information given, will the General Manager of Honshu Properties acquire Havana Peak? Explain with supporting computations.
g. If the CFO of Acrux Group had the same information as the General Manager of Honshu, would the CFO of Acrux willing to invest in Havana Peak? Explain with supporting computations.
h. What is your recommendation to the CFO of Acrux Group as to the performance measurement and incentive system of Honshu Properties?

QUESTION 2

Wing Wing Limited is a licensed tour operator in Hong Kong and it operates tours throughout the Asia-Pacific region. Due to increasing competition, the company would like to drop one of it's tour: the two-macau trip. An income statement from this tour is given below:

Ticket revenue (110 seat capacity × 40% occupancy ×

$75 ticket price per person)	$3,300
Variable expenses ($15 per person)	660
Contribution margin	$2,640
Tour expenses:
Tour promotion	$ 680
Salary of bus driver	360
Fee, tour guide	720
Fuel for bus	160
Depreciation of bus (note 3)	360
Liability insurance, bus (note 4)	210
Overnight parking fee, bus	80
Room and meals, bus driver and tour guide	190
Bus maintenance and preparation (note 2)	230
Total tour expenses	2,990
Net operating loss	$(350)

The following additional information is available on the Macau tour:

1. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.
2. An allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition.
3. Depreciation of buses is due to obsolescence. Depreciation due to wear and tear is negligible.
4. Liability insurance premiums are based on the number of buses in the company's fleet.
5. Dropping the Macau tour would not allow Wing Wing to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff.

Required:
a. Prepare an analysis showing what the impact will be on the company's profits if the Macau tour is discontinued.

b. The company's tour manager has been criticized as only about 50% of the seats on Wing Wing's tours are being filled as compared to an industry average of 60%. The tour manager has explained that Wing Wing's average seat occupancy could be improved considerably by eliminating about 10% of its tours, but that doing so would reduce profits. Explain how this could happen.