Coast4life Case
Coast4life Inc.
Prepared for: Coast4Life’s board of directors
Prepared by: Pat Brown, CMA
Date: January 24, 2014
Introduction:
Cruise industry is facing a worldwide downturn after terrorist attack in Caribbean in Sep.
30, 2010 and the decline in bookings of cruises next year implies that the cruise revenues may shrink worldwide.
Financial analysis for the year ended 2012(appendix1)
Current ratio of 1.59 indicates that the company can meet its short term obligations.
There is a 48% improvement versus last year’s current ratio of 1.07 .quick ratio of
1.75shows a 45% improvement.
Total debt to equity ratio of 1.23 shows an 18% improvement over prior years ratio of
1.49 indicating that the firm is relying less on debt. Times interest …show more content…
earned ratio of 6.4 improved by 33%.
Profitability ratios indicate overall earnings growth, net margin of 15% grew by 15% compared to 12% in 2011 while return on equity of 29% grew by 12%.return on investment of 22% shows 22% growth from 18%.
Identification of issues and related alternatives:
Although in the past three years, the Coast4Life Inc. has been growing fast with continuing improvement in profitability, it may still suffer a net loss if the revenue shrinks with the expected estimated 30%-35% decline in overall booking. Therefore Coast4Life
Inc. must focus on remaining profitable during the downturn all the way through cutting costs and generating additional revenue, while strengthening its key success factors and mitigating its key risks by:
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- Offering safe, enjoyable and unique cruise experience
- Affordable prices and high quality level of services
- Ships are well maintained which exceeded environmental and safety regulations
The proposed strategic alternatives need to be address as follows:
1. Divesting the Fraser dry dock
2. Targeting a more profitable market segment
3. Registering Coast4Life ships in Liberia and hire low waged workers
4. Implementing a web-based booking system
Analyses of Strategic Alternatives:
1. Divesting the Fraser dry dock
Pros:
- Savings on avoidable expenses amounting to $2,542K
Cons:
- Unavoidable maintenance cost of $2M per ship
- Could damage the relationship with the local community and governments
- Lost contribution to the overall profitability of the company
- Could hurt Coast4Life’s reputation for safety
- Unknown cost and service change of outsourcing
Quantitative Analysis:
Through divesting the Fraser dock, company would generate negative cash flow
$2,184K.
See Appendix 2 for detail analysis.
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2. Targeting more profitable market segment
Pros:
- 40% of passengers aged 40 and under have potential to become repeat customers
Cons:
- Passengers between 40 to 60 years old are 8% less than industry standard
- Only 20% of repeat passengers while industry standard is 40%
Quantitative Analysis:
By increasing 8% of age between 40-60 years old customers to the industry standard, will increase $2,655K contribution margin.
By increasing repeat customers rate to the industry standard of 40%, will create
$6,547K contribution margin for company.
See Appendix 3 for quantitative analysis details
3. Registering ships and hire low waged workers in undeveloped countries
Pros:
- Cost of hospitality staff for a ship will be 30% less
Cons:
- Service quality level could go down
- Public relations issues could damage company’s reputation
- Wages and salaries pertain to captains, offers and sailors maintain unchanged
Quantitative Analysis:
Through cutting workers wages by 30%, company will create incremental profit after tax by $833K
See Appendix 4 for quantitative analysis details.
4. Implementing a web-based booking system
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Pros:
- Reduce the travel agent commissions by 10%
- Enable ship-to-shore electronic communication of transactions
Cons:
- Cost of set up and software approximately $50K
- Cost of an accounting module $25K
- Related cost of system maintenance
Quantitative Analysis:
By implementing a web-based booking system, company will generate $25K incremental operating income after tax
See Appendix 5 for quantitative analysis details.
Recommendations:
Alternative1:
Could not supply the company long-term revenue while fix the short-term turndown. On the other hand it may turn the company’s reputation down.
Alternative 2:
Provide a long-term incremental income for company if the company target and increase the vale customer’s percentage, therefore it is a recommended solution.
Alternative 3:
Would damage the company’s reputation if any low standard service happens because of the unskilled works.
Alternative: 4
Will increase the revenue for long-term company run without any additional expenses; therefore it is a recommended solution.
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Conclusion:
Based on a review of the strategic alternatives available to Coast4Life, the recommended strategies are targeting a more profitable market segment and implementing a web-based booking system. Both of these alternatives are aligned with the company's mission and will strengthen its reputation in the cruise industry.
Coast4Life also need to release the cash shorten problem by convincing the stakeholders to give up the dividends in 2013 (see
applendix6).
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Applendix1
Financial Analysis liquidity quick-ratio current-ratio 2012
1.59
1.75
2011
1.07
1.21
2010
0.5
0.64
debt-to-equity times interest earned
1.23
6.43
1.49
4.88
1.69
3.22
return on equity gross margin profit margin return on asset
0.29
0.6
0.22
0.26
0.59
0.18
0.16
0.59
0.12
total asset turnover degree of operating leverage
0.74
2.07
0.67
2.25
0.52
2.5
solvency
profitability
Activity
Applendix2
Cash Flow Analysis ( ' 000s)for alternative1 revenues decrease
-$4,000
employee termination cost
commercial dry dock cost
-$426
4,300-2,600
gain on dry dock sale
6*71
$1,700
2000
-$2,000
avoidable expenses
$2,542 wages&salaries fuel direct material advertising insurance amortization Incremental Cash flow
M1A1
2647*4000/6280=1686
49*4000/6280=31
1087*4000/6280=692
32
41
60
-$2,184
Page 7
Applendix3
Passengers’ mix Analysis for alternative2
passengers industry coast4life age60 33%
30%
total first-time repeat total 60%
40%
80%
20%
total per CM number revenue revenue variances
9,784
1,767 $3,042,995
7,339
2,120 -$2,655,203
7,339
1,767 -$829,908
24,462 $45,813,000
$1,873 -$442,116
19,570 $35,584,000
4,892 $10,229,000
24,462 $45,813,000
$1,818
$2,091
$1,873
$5,692,405
-$6,547,205
-$854,800
note1:CM%=(314-114)/314=64% note2:age 40-60 passengers spend 20% more than others note3:repeat passengers spend 15% more than first time
Note4:
calculation for
CM (.4-.29)*24462*1767*.64
(.3-.38)*24462*2120*.64
(.3-.33)*24462*1767*.64
(.8-.6)*24462*1818*.64
(.2-.4)*24462*2091*.64
Applendix4
Incremental Operating Income( ' 000s)for alternative3
salaries/wages coastal native
$3,013
natural splendour
$3,259
total
$6,272
incremental operating incom after tax M1A1
workers wages 30%less of wages
$2,109
$633
$2,636
$791
$4,745
$1,424
$883
Page 8
Applendix5
Incremental Operating Income ( ' 000s)for alternatiive4 incremental CM saving on agent commission10% set up cost accounting module cost total incremental operating income after tax
calculation
2146/24462*13200
$116 *10%
-$50
-$25
$41
$25
note: assume 2013 panssengers13200 M1A1
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Applendix6
Capital Budget Analysis
2012Oct2013Apr2013Mar
2013Sep passengers 5,400
employees revenues 7,800
574
13,200
2014
24,000
direct cost
-$4,815
selling expense amortization expense interest expense income before tax net income
-$2,745
574
574
$28,710 $52,200
-$6,955 -$11,770 $21,400
-$3,965
-$6,710 $12,200
-$2,165
-$1,250
$770
-$2,165
-$1,250
$2,630
other expenditures damage repair dividend paid cash shortage
574
2013
$11,745
$16,965
-$4,330 -$4,330
-$2,500 -$2,500
$3,400 $11,770
$2,108
$7,297
-$3,000
-$4,500
-$5,392
-$4,500
$2,797
note: assume passengers drop by55% for following six month and35% then
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Prepared for: Coast4Life’s board of directors
Prepared by: Pat Brown, CMA
Date: January 24, 2014
Introduction:
Cruise industry is facing a worldwide downturn after terrorist attack in Caribbean in Sep.
30, 2010 and the decline in bookings of cruises next year implies that the cruise revenues may shrink worldwide.
Financial analysis for the year ended 2012(appendix1)
Current ratio of 1.59 indicates that the company can meet its short term obligations.
There is a 48% improvement versus last year’s current ratio of 1.07 .quick ratio of
1.75shows a 45% improvement.
Total debt to equity ratio of 1.23 shows an 18% improvement over prior years ratio of
1.49 indicating that the firm is relying less on debt. Times interest …show more content…
earned ratio of 6.4 improved by 33%.
Profitability ratios indicate overall earnings growth, net margin of 15% grew by 15% compared to 12% in 2011 while return on equity of 29% grew by 12%.return on investment of 22% shows 22% growth from 18%.
Identification of issues and related alternatives:
Although in the past three years, the Coast4Life Inc. has been growing fast with continuing improvement in profitability, it may still suffer a net loss if the revenue shrinks with the expected estimated 30%-35% decline in overall booking. Therefore Coast4Life
Inc. must focus on remaining profitable during the downturn all the way through cutting costs and generating additional revenue, while strengthening its key success factors and mitigating its key risks by:
M1A1
Page 2
- Offering safe, enjoyable and unique cruise experience
- Affordable prices and high quality level of services
- Ships are well maintained which exceeded environmental and safety regulations
The proposed strategic alternatives need to be address as follows:
1. Divesting the Fraser dry dock
2. Targeting a more profitable market segment
3. Registering Coast4Life ships in Liberia and hire low waged workers
4. Implementing a web-based booking system
Analyses of Strategic Alternatives:
1. Divesting the Fraser dry dock
Pros:
- Savings on avoidable expenses amounting to $2,542K
Cons:
- Unavoidable maintenance cost of $2M per ship
- Could damage the relationship with the local community and governments
- Lost contribution to the overall profitability of the company
- Could hurt Coast4Life’s reputation for safety
- Unknown cost and service change of outsourcing
Quantitative Analysis:
Through divesting the Fraser dock, company would generate negative cash flow
$2,184K.
See Appendix 2 for detail analysis.
M1A1
Page 3
2. Targeting more profitable market segment
Pros:
- 40% of passengers aged 40 and under have potential to become repeat customers
Cons:
- Passengers between 40 to 60 years old are 8% less than industry standard
- Only 20% of repeat passengers while industry standard is 40%
Quantitative Analysis:
By increasing 8% of age between 40-60 years old customers to the industry standard, will increase $2,655K contribution margin.
By increasing repeat customers rate to the industry standard of 40%, will create
$6,547K contribution margin for company.
See Appendix 3 for quantitative analysis details
3. Registering ships and hire low waged workers in undeveloped countries
Pros:
- Cost of hospitality staff for a ship will be 30% less
Cons:
- Service quality level could go down
- Public relations issues could damage company’s reputation
- Wages and salaries pertain to captains, offers and sailors maintain unchanged
Quantitative Analysis:
Through cutting workers wages by 30%, company will create incremental profit after tax by $833K
See Appendix 4 for quantitative analysis details.
4. Implementing a web-based booking system
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Pros:
- Reduce the travel agent commissions by 10%
- Enable ship-to-shore electronic communication of transactions
Cons:
- Cost of set up and software approximately $50K
- Cost of an accounting module $25K
- Related cost of system maintenance
Quantitative Analysis:
By implementing a web-based booking system, company will generate $25K incremental operating income after tax
See Appendix 5 for quantitative analysis details.
Recommendations:
Alternative1:
Could not supply the company long-term revenue while fix the short-term turndown. On the other hand it may turn the company’s reputation down.
Alternative 2:
Provide a long-term incremental income for company if the company target and increase the vale customer’s percentage, therefore it is a recommended solution.
Alternative 3:
Would damage the company’s reputation if any low standard service happens because of the unskilled works.
Alternative: 4
Will increase the revenue for long-term company run without any additional expenses; therefore it is a recommended solution.
M1A1
Page 5
Conclusion:
Based on a review of the strategic alternatives available to Coast4Life, the recommended strategies are targeting a more profitable market segment and implementing a web-based booking system. Both of these alternatives are aligned with the company's mission and will strengthen its reputation in the cruise industry.
Coast4Life also need to release the cash shorten problem by convincing the stakeholders to give up the dividends in 2013 (see
applendix6).
M1A1
Page 6
Applendix1
Financial Analysis liquidity quick-ratio current-ratio 2012
1.59
1.75
2011
1.07
1.21
2010
0.5
0.64
debt-to-equity times interest earned
1.23
6.43
1.49
4.88
1.69
3.22
return on equity gross margin profit margin return on asset
0.29
0.6
0.22
0.26
0.59
0.18
0.16
0.59
0.12
total asset turnover degree of operating leverage
0.74
2.07
0.67
2.25
0.52
2.5
solvency
profitability
Activity
Applendix2
Cash Flow Analysis ( ' 000s)for alternative1 revenues decrease
-$4,000
employee termination cost
commercial dry dock cost
-$426
4,300-2,600
gain on dry dock sale
6*71
$1,700
2000
-$2,000
avoidable expenses
$2,542 wages&salaries fuel direct material advertising insurance amortization Incremental Cash flow
M1A1
2647*4000/6280=1686
49*4000/6280=31
1087*4000/6280=692
32
41
60
-$2,184
Page 7
Applendix3
Passengers’ mix Analysis for alternative2
passengers industry coast4life age60 33%
30%
total first-time repeat total 60%
40%
80%
20%
total per CM number revenue revenue variances
9,784
1,767 $3,042,995
7,339
2,120 -$2,655,203
7,339
1,767 -$829,908
24,462 $45,813,000
$1,873 -$442,116
19,570 $35,584,000
4,892 $10,229,000
24,462 $45,813,000
$1,818
$2,091
$1,873
$5,692,405
-$6,547,205
-$854,800
note1:CM%=(314-114)/314=64% note2:age 40-60 passengers spend 20% more than others note3:repeat passengers spend 15% more than first time
Note4:
calculation for
CM (.4-.29)*24462*1767*.64
(.3-.38)*24462*2120*.64
(.3-.33)*24462*1767*.64
(.8-.6)*24462*1818*.64
(.2-.4)*24462*2091*.64
Applendix4
Incremental Operating Income( ' 000s)for alternative3
salaries/wages coastal native
$3,013
natural splendour
$3,259
total
$6,272
incremental operating incom after tax M1A1
workers wages 30%less of wages
$2,109
$633
$2,636
$791
$4,745
$1,424
$883
Page 8
Applendix5
Incremental Operating Income ( ' 000s)for alternatiive4 incremental CM saving on agent commission10% set up cost accounting module cost total incremental operating income after tax
calculation
2146/24462*13200
$116 *10%
-$50
-$25
$41
$25
note: assume 2013 panssengers13200 M1A1
Page 9
Applendix6
Capital Budget Analysis
2012Oct2013Apr2013Mar
2013Sep passengers 5,400
employees revenues 7,800
574
13,200
2014
24,000
direct cost
-$4,815
selling expense amortization expense interest expense income before tax net income
-$2,745
574
574
$28,710 $52,200
-$6,955 -$11,770 $21,400
-$3,965
-$6,710 $12,200
-$2,165
-$1,250
$770
-$2,165
-$1,250
$2,630
other expenditures damage repair dividend paid cash shortage
574
2013
$11,745
$16,965
-$4,330 -$4,330
-$2,500 -$2,500
$3,400 $11,770
$2,108
$7,297
-$3,000
-$4,500
-$5,392
-$4,500
$2,797
note: assume passengers drop by55% for following six month and35% then
M1A1
Page 10