a) Outline the main reasons why the operating profit margin of a hotel would increase from one year to the next

The operating profit margin will increase due to the following reasons:

1) An increase in the gross profit margin. This can be caused by the following

• An increase in selling price
• A reduction in the cost price of stock purchases
• Changes in the product sales mix with the business selling a higher proportion of goods with a higher gross profit margin.

2) A decrease in the expenses to sales ratio. This can be caused by the following

• A decrease in expenses without a similar decrease in sales.
• An increase in sales without a similar increase in expenses.

b) Outline the effect each of the following decisions would have on the return on capital employed ratio:

i. Increasing sales price. As long as there is no reduction in sales volume then sales and profit increase and thus ROCE increases.

ii. Paying off a long-term loan with cash in hand. This will have the effect of reducing the capital invested in the business as well as reducing loan interest thus ensuring a higher profit before tax. Thus ROCE should increase.

iii. Reducing fixed costs in the profit and loss account. This should have the effect of increasing profits and thus increasing ROCE.

iv. Arranging an overdraft facility. No effect