Increased Cost Savings and Revenue
By: Alpagulf • Term Paper • 3,102 Words • October 17, 2014 • 915 Views
Increased Cost Savings and Revenue
M1A1 - 1029450
COAST4LIFE Inc.
M E M O R A N D U M
To: Board of Directors From: Pat Brown , Controller
Subject: Increased cost savings and revenue Date: September 26 2013
Introduction:
Coast4Life Inc has successfully grown its business from a $9.4 million company in 2002 to $55.7 million company in 2012. Unfortunately due to a terrorist attack in September 2012 on another cruise line the industry as a whole expects bookings to drop by 50 % to 55% globally over the next six months and 30% to 35% annualized over the next year.
Recovery to 2012 levels is projected to occur by 2014. (See Appendix A)
The Board of Directors has mandated that Cruise4Life continue to remain profitable during the downturn in business.
The purpose of this report is to analyse and identify risks and suggest alternative solutions.
Identification of issues
An expected drop in bookings for 50% to 55% over the next six months and 30% to 35% over the next year. This would result in a decline in revenue of approximately $19 million.
They have proposed the following four options to meet the mandate of the Board of Directors :-
1. Divest the Fraser Dry dock
2. Target a more profitable market segment
3. Register its cruise ships in Liberia and hire unskilled, cheap labour
4.Implement a web based booking system
Analysis of Alternatives
Alternative 1 - Divest Fraser Dry Dock
Pros:
- The Current book value of the drydock is $2.6 million and if they accept the offer to sell at a price of $4.3 million will definitely produce an instant source of cash flow.
- Should they choose to sell the dry dock the cruise line would realise a cost savings of$1.374 million dollars in 2012. (Sale Price $4.3 million less operating costs $ 5.674 million).
3. The sale will also eliminate layoffs and generate future cash flow
4. Outsourcing the maintenance will reduce costs - $2.0 million versus $2.16 million
per ship.
5. This will allow them to focus on their core business of promoting cruises.
Cons:
- The manager is of the opinion that selling the dry dock could harm the cruise line
as its passengers may be concerned about safety. Since the repairs and maintenance has to be out sourced and Coast4Life would have little or no control of the quality of work performed.
2. Maintenance fees of $2.0 million not guaranteed
3. There could be potential loss of revenue from external maintenance contracts
4. Termination of employees would hurt the company's reputation within the
community and the local government agencies.
Alternative 2 - Target a more profitable market segment
Pros:
1. Increase repeat traveller rate from 20% to 40% (See Appendix B)
2. Target a more diverse age group by offering unique services and features
3. More value for their money
Cons:
1. Target segment for repeat travellers may be very small due to aging population
2. There is a cost associated with diversifying its target market - advertising,
incentives
- A younger age group may not have access to the financial resources that more
mature travellers would limited on board sales and extras on cruises.
Alternative 3 - Register its cruise ships in Liberia and hire unskilled,
cheap labour
Pros:
1. Cost of labour would be reduced by as much as 20% to 30%
2. Availability of a large labour force to draw from.