Critical evaluation of the decision to dispose of the three routes

Managerial Accounting Assignment Question Programme : Master of Business Administration Module : MANAGERIAL ACCOUNTING Term : 2016T3 Online Submission Dateline : 20th November 2016 12:00 AM (Midnight) Malaysia Time Zone Report Length : 4,000 words maximum May Airlines is a leading business in travelling industry and has experienced turbulent times during the past 10 years due to stiff competition and as a result of global slowdown in the world economy. It has now emerged from the recession to earn revenue of $15.121 million for the year 20X6 through many initiatives such as better managing costs while ensuring customers benefits with more choice. A new scheme of pricing strategy was implemented with a view to maintain market share and to position the airlines for future growth within the next seven years. 2016 2015 Change in % Route Revenue ($ Million) Home county 1,906.7 2,015.2 (5) Asian 2,001.3 1,576.2 30 Europe and Middle East 2,286.6 1,962.8 17 Australia and New Zealand 1,514.5 1,517.3 (0.2) Africa and South America Nil 18.1 (100) Orient and North America 1,690.3 1,635.0 3 GROUP FINANCIAL PERFORMANCE 2016 2015 2014 2013 2012 The assignment requires knowledge and the application of capital investment decisions (capital budgeting), gearing, contribution, financial ratios and budgetary controls. Required: You are asked to prepare a report to address the following matters that have been raised by the non executive director of the company. (a) As a going concern, he wishes to evaluate the six revenue earning routes starting from the home country and the five others in light of stiff competition posed by the emerging in the Asia Pacific region. He has asked you to identify and assess: • the routes that are producing of low level of profit and incurring huge working capital investment, and • the implications of low profit yielding routes for adequate financial returns and profitability. (b) He wishes to make a strategic decision about the long term viability of the three revenue losing routes of home country, Australia & New Zealand and South American divisions that face stiff competition from Hong Kong and Austrilian low cost carriers. As these divisions require considerable amount of capital expenditure and management cost information to improve efficiency and to make more competitive, he plans to dispose of the services of these three divisions. Critically evaluate the decisions to discontinue operations in these divisions, even though the revenue from them still runs into many million dollars. Total Revenue-$000 Total Expenses-$000 Taxation-$000 Profit/(Loss) after tax-$000 Shareholders’ funds-$000 Net profit margin % Return on Shareholders’ fund EPS Net tangible asset per Share PRODUCTION Network Size-KM Time Flown-Hours Distance Flown-000 KM Available Capacity-000 TKM Available passenger capacity 000 Seat KM (c) Delays related to the Air Traffic Control let to heavy congestion in the skies over its own airports and this has been a major cause for concern. The CEO wants a close cooperation among its own team to improve various operational issues of the airport operations. The airline is required to identify the key areas for allocating finance resources to achieve a high return for the shareholders. (i) Identify and analyse the factors which influence capital budgeting decisions that required efficient investment decisions over competing concerns (ii) Critically analyse the relative importance of the management intention to reduce too much of borrowing through long term bank loan and other external lenders to continue with modernization programmes (d) The Chairman advises on decentralization programme in which the decision making would be handed over to a new CEO to be appointed soon. It involves in online communication improvement and decision making techniques that would eventually cuts off staff up to 6 000 of them gradually over a three period. Effective use of regular reporting system using financial ratios and actual performance monitoring against budget is expected to spear headed. (i) Advise the managing director on the reliance of using financial ratio analysis and budgetary controls for co-ordination and control of the group and the possible risks that the company may face. (ii) Critically analyse how you would expect the management accounting function and ethical issues to be re-organized if the company expands its operations to number of different countries that affected by the ‘Brexit’ decision of UK (All relevant assumptions, fictitious statistics and calculations should be included in the report (or as an appendix to it) Instructions for Report 1. Executive summary (200-300 words, not to be included in the word count) 2 Table of contents 3 Introduction 4 Main body 5 Conclusion 6 References Criteria for REPORT in percentage 1. Executive summary [5] 2. Table of contents [3] 3. Introduction [12] 4. Main body [80] a, b, c, d and overall presentation (a) [Max 20] # service routes producing low returns in terms of revenue and requiring huge working capital investments # implications of low revenue routes to overall financial returns and profitability (b) [max 15] # critical evaluation of the decision to dispose of the three routes (c) [max 20] # identification and analysis of factors that influence capital budgeting decision and for ranking of projects that competing for scarce financial resources # critical analysis for reducing dependent on too much of borrowing of external funds for modernization programmes (d) [max 25] # Advice on the reliance of financial ratios analysis and budgetary controls for co-ordination and control of the group performance # Critical analysis of the company’s management accounting function and ethical issues in the face of “Brexit” decisions by UK Further Instructions • Font Style: Times New Roman & Font Size: 12 • Line Spacing: 1.5 • Page Layout/Orientation: Portrait • All the margins should be set about 25mm on both sides (i.e. left & right) of each page. • Numerical Systems (e.g 1.0, 1.1 and 1.1.1) should be used for each section and subsection. • Word count must be indicated on the cover page of the assignment. Important Note: This assignment MUST be submitted on or before the due date which is the 20th November 2016. Word Count • Your word count should not include your reference list. You should provide your word count at the end of your report. • Exceeding the word count by more than 10% will result in a penalty of 10% of your marks for your work. • If your work is significantly shorter, then you will probably have failed to provide the level of detail required.