A Report On Funding, Cost Behavior, And Pricing Strategies For Titan Travel’s Expansion In Japan

Funding Sources for Titan Travel’s Expansion Plan

The current report aims to deal with choosing an organisation in the travel and tourism industry of UK. Therefore, for fitting the purpose of this assignment, Titan Travel has been selected as the organisation, since it is one of the leading escorted tour operators in UK. It is operating for more than 30 years and it has offered inspirational escorted tours across various global nations. The customers could select from a range of options with above 300 individual itineraries constituting of rail, coach, air and river or ocean cruising elements (Titantravel.co.uk 2017). The company is planning to expand its business operations in the market of Asia, especially Japan for accomplishing efficiency and competitive advantage in the global market.

The report would highlight the various sources of funding that Titan Travel could seek for expanding its business operations in Japan. The second section would focus on explaining the cost behaviour and significance of cost-volume-profit analysis for making useful decisions. The final section of the report would shed light on recommending suitable pricing strategies in the context of the expansion plan for Titan Travel.   

For expanding its business operations in Japan, Titan Travel needs to consider a variety of factors in relation to the methods used for raising funds. However, it needs to exercise adequate care for dealing with nuances in Asia in terms of labour, new facilities and suppliers (Becker 2016). The following are the major sources of funding available to Titan Travel for its proposed expansion plan:

Retained earnings:

In relation to the sources of finance reviewed, retained earnings are the top selection for Titan Travel. The main reason behind selecting this source is that the accumulated cash of an organisation signifies effective use of funds, in which the expected return would be higher compared to the interest earnings (Buckley and Mossaz 2016). In addition, the funds that Titan Travel would invest in its operations, denoted through expansion in Japan, have other advantages. The first benefit is control, in which the use of retained earnings for investment in Japan expansion project irrespective of the type denotes that Titan Travel has control over its funds. However, the case might not be the same in terms of investment in financial vehicles using idle cash (Cohen 2016).

In choosing retained earnings, the organisation has adequate cash, which does not deplete its financial reserves. A major benefit of using retained earnings is that relying on the kind of expansion area, the estimated earnings window concerning generation of revenue and extent of firm exposure is the issue (Cook, Hsu and Marqua 2014). In this case, Titan Travel could use 60% of its retained earnings, which would enhance the prospects of dealing with unforeseen events in the new market.  

Cost Behavior and Significance of Cost-Volume-Profit Analysis

Mix of retained earnings and equity financing:

This is a debt-free approach at the time the retained earnings of the organisation are not adequate in funding the expansion project and leaving an adequate reserve against unforeseen circumstances. Based on the amount of retained earnings, 40% could be viewed as appropriate figure, if the cash in hand of Titan Travel is not sufficient in underwriting the expansion plan. This would leave 60% in reserve, in which private placement develops the platform for ensuring the leftover funding (Crotti and Misrahi 2015).

Equity finance approach:

This is the third alternative, in which Titan Travel could raise funds with the help of equity financing using private placement. This would eradicate the requirement for interest charges and debt; however, certain drawbacks are associated with this approach as well.  The first is the amount of estimated funds required in completing the project (Han and Yoon 2015). As unforeseen circumstances are always an element of risk, which denotes that the organisation would need to include a contingency of at least 20% in the private placement for having a reserve. The issue is that Titan Travel needs to issue additional shares. However, as such shares become tradable later, it has to take the risk that if estimations and target dates are missed, the effect of shares hitting the market might have negative impact on the share price (Hernández-Méndez, Muñoz-Leiva and Sánchez-Fernández 2015).

This denotes the influence of share dilution, which the market could not absorb at the time the market fails to meet the estimated outcomes. Hence, this method depicts additional risk on the part of Titan Travel, since it would bet its future stock performance compared to the projected outcomes. The consequences might have negative influence on the institutional investors and shareholders, if the opportunity of the organisation fails to meet the expectations.

Bank borrowings:

This type of source of funding is the least preferable of all the three methods. This is because Titan Travel would be taking on debt. From the perspective of the analysts and shareholders, it could signify that the organisation is not financially viable in terms of preparation for the expansion plan, since it fails to accumulate the required capital internally (Jenkins and Schröder 2013). There might be instances, in which an attractive deal presents itself so that Titan Travel needs to act. This implies that borrowing might depict commitment level and the downfall is the debt obtained for funding the deal. This would enforce on Titan Travel to the point, in which unforeseen events could place the entire organisation in an adverse position.

Recommended Pricing Strategies for Titan Travel’s Expansion Plan

Hence, based on the above discussion, it is recommended to Titan Travel to obtain funding fully from retained earnings or through a mix of retained earnings and equity financing.

As commented by John and Susan (2015), cost behaviour depicts the way of change in various types of production costs, when the level of production changes. Based on behaviour, there are three major kinds of costs:

Fixed costs:

Fixed costs are costs that do not vary with any change in the level of activity. Titan Travel would have to incur these costs, even if no production is carried out after its expansion in Japan. For example, fixed costs in this expansion plan might be in the form of rent expense, straight-lie depreciation expense. However, fixed cost per unit falls with rise in production. The below-stated example describes the fact:

Particulars	Amount (in $)	Amount (in $)	Amount (in $)
Rent expense	40,000	40,000	40,000
Depreciation expense	7,000	7,000	7,000
Total fixed cost	47,000	47,000	47,000
Number of bookings	2,000	4,000	6,000
Fixed cost per unit	23.5	11.75	7.83

Table 1: Total fixed cost and fixed cost per unit of Titan Travel at different activity level

(Source: As created by author)

Figure 1: Fixed cost and change in fixed cost per unit at different activity level

(Source: Jucan and Jucan 2013)

In case of Titan Travel, it is assumed that Titan Travel would be able to accept 6,000 bookings in its initial year of operation in Japan, in which the fixed cost per unit would be $7.83.

Variable costs:

The variable costs are those costs that vary directly with the level of production. This implies that there would be rise in variable cost with increase in production and vice-versa (Nawaz and Hassan 2016). The below-stated example describes the fact:

Particulars	Amount (in $)	Amount (in $)	Amount (in $)
Direct labour	2,500	2,900	3,200
Salaries and wages	20,000	23,000	28,000
Supplies and travel	800	1,200	1,600
Sales commission	7,000	7,000	7,000
Total variable cost	30,300	34,100	39,800
Number of bookings	2,000	4,000	6,000
Variable cost per unit	15.15	8.53	6.63

Table 2: Total variable cost and variable cost per unit of Titan Travel at different activity level

(Source: As created by author)

Figure 2: Variable cost and change in variable cost per unit at different activity level

(Source: Prebensen, Chen and Uysal 2014)

In case of Titan Travel, it is assumed that Titan Travel would be able to accept 6,000 bookings in its initial year of operation in Japan, in which the variable cost per unit would be $6.63.

Mixed costs:

Mixed costs are those costs, which possess the properties of both variable and fixed costs. For instance, telephone expense and fuel expense are mixed costs, as telephone expense comprises of a fixed component like line rent and fixed subscription charges along with variable cost charged per minute cost. In case of Titan Travel, this cost type has not been taken into consideration for the expansion plan.

Conclusion

Significance of CVP analysis:

Titan Travel could rely on CVP analysis, if the costs remain identical within a particular level of production. This is because this analysis is a method of cost accounting, which is related to the impact of varying levels in sales and costs associated with the operating profit of the organisation (Robinson et al. 2016). It is assumed that Titan Travel would be able to make 6,000 bookings, while a further assumption is made that the costs could be fixed or variable in CVP analysis.

In addition, with the help of CVP analysis, contribution margin is used for managing the service contribution margin, which is the outcome obtained after deducting variable costs from overall sales. In order to ensure the success of the expansion plan, Titan Travel is required to ensure that the contribution margin is higher in contrast to the overall fixed costs. Along with this, the organisation could use contribution margin for ascertaining the break-even point of sales. The CVP analysis in the context of this specific expansion plan is discussed as follows:

Particulars	Amount (in $)
Selling price per booking	28
Sales revenue	168,000
Less: Variable costs	39,800
Contribution margin	128,200
Contribution margin per booking	21.37
Less: Fixed cost	47,000
Net income	81,200
Break-even (in bookings)	2,200
Break-even (in sales)	61,591.26

Table 3: CVP analysis for the proposed expansion plan

(Source: As created by author)

According to the above table, it could be stated that the minimum number of bookings that Titan Travel would have to make after expanding its business operations in Japan is 2,200 for avoiding loss situation. As a result, the break-even sales of the organisation would be $61,591.26, in which it would neither make any profit nor incur any loss.

The pricing strategies that are available to Titan Travel to expand its business operations include the following:

Skimming:

This strategy takes place when an organisation sets a higher price for attracting the most valuable customers of the market (Tan et al. 2017). This strategy would be successful for Titan Travel, if it could design a unique package by anticipating demand to be relatively inelastic in the Japanese market. In addition, the customers would not be sensitive to price, which would increase the volume of sales of the organisation. However, this strategy is useful only when Titan Travel does not have the ability to accumulate capital and resources for providing large service volume.

Penetration pricing:

Penetration pricing involves an organisation setting a lower price and thus, the aim is to attain the maximum market share possible (Xiang, Magnini and Fesenmaier 2015). Titan Travel could adopt this pricing strategy, since demand is highly elastic and thus, setting lower prices would increase the overall revenue base of the organisation. Moreover, the economies of scale are large in the global market and plenty of competitors might enter the Japanese market. Hence, it is advised to Titan Travel to adopt the penetration pricing strategy for assuring the success of its expansion plan in Japan.

Conclusion:

Based on the above discussion, it could be evaluated that the most feasible sources of finance for Titan Travel in order to expand its business operations in Japan include retained earnings and a mix of retained earnings and equity. In addition, the various cost behaviours have been described in the report, in which it has been found that for this specific expansion plan, fixed costs and variable costs would be incurred, while the mixed costs would not be taken into consideration. Finally, it is recommended to the organisation to adopt penetration-pricing strategy in the Japanese market for increasing its revenue base to cope up with the existing and upcoming competition.

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