a) Calculate the above financial indicators for 2006

b) Write a report on profitability and operating performance of Terri's Tours in comparison to the budget targets set

 Overall Terri’s Tours made an operating profit of €1,590,000 for the year. This was down 20% on the budget target of €1,986,525. Actual sales revenue was 8.1% less than the target for the year and this is reflected in an actual ROCE of 7.7% compared to the budget target of 8.75%. In analysing the fall in ROCE one must break-down the ROCE into its two component parts namely capital employed turnover and operating profit margin.

• Capital employed turnover:

Capital employed turnover is 0.35 for both the budget and actual performance. This reflects the fact that the company is generating the same level of sales per € invested in the business. However actual sales in packages fell 1% and actual sales revenue fell 8.1%. This suggests that the level of investment in the business fell during the year where possible the company sold off some of its assets thus explaining to some extent the reason for a lower sales volume. It also tells us that the main reason for the reduction in ROCE is due to a reduced operating profit margin.

• Operating profit margin:  

The company achieved an operating profit margin of 21.8% compared to the target set at 25%. The following are the main reasons for this.

·         The company set a target average price per package of €810 however it only achieved a price of €753.  Management need to assess the reasons for this and ascertain whether this was common across the sector due to for example levels of competition or other external factors. Did management try to boost sales volume by reducing the price??

·         The company sold less packages for Andorra its high profit location thus reducing the overall operating profit margin as Andorra has a lower direct cost to sales percentage compared to France and Italy.

·         Overall costs increased as a percentage of sales. Total operating costs as a percentage of sales for 2006 was 78.2% compared to the budget target of 75%. Labour costs as a percentage of sales was 36% in 2006 compared to the budget target of 32%. Overall direct costs as a percentage of sales increased with the more significant increases occurring for France(64% compared to budget of 60% and Andorra (30% compared to the budget target of 25%) Operating expenses as a percentage of sales for 2006 was 28.5% compared to the target of 27%.

·         Overall the sales and operating profit per employee fell compared to the budget targets. Although the company was only 1% short of its budget target for packages sold it did not achieve its target prices. Operating costs as a percentage of sales increased in the main due to the increasing sales revenue figures. This is also true of the direct costs for both France and Andorra. 

Before any further investigations the company must re-assess the reasonableness of its budget targets especially the average price per package set in the budget. This should be compared to previous years average prices achieved and management should try and assess where there any particular factors or random events that lead to the company not achieving its target prices.