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Capital Allocation And Delegation Of Decision

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Question:

Discuss about the Capital Allocation and Delegation of Decision.
 
 

Answer:

Introduction:

The current report aims to deal with three different case studies; the first is related to Dorquay Hotel. The budgeted room revenue for three months of the hotel has been computed by considering the expected room occupancy and expected average room rate. This has been validated further by explaining the way the management of the hotel has estimated the occupancy rate. The second case deals with the ethical issues related to Practical Solutions Limited and Dogto Limited to find out ethical issues and the merits and demerits of employee code of conduct to the former organisation. The final case study sheds light on computing the break-even for Chloe Enterprises along with evaluating the feasibility of the proposed change in the marketing strategy of the organisation.

Calculation of budgeted room revenue for Dorquay Hotel:

Particulars

December

January

February

Number of rooms

20

20

20

Average room rate

 $       180

 $    198

 $     198

Room occupancy rate

90%

95%

85%

Budgeted room revenue

 $    3,240

 $ 3,762

 $  3,366

For estimating the minimum length of stay, Dorquay Hotel estimates a period of high demand, which is followed by low demand. It accepts longer duration stays during arrival, while it rejects shorter duration stays (Butler & Ghosh, 2015). This helps to raise occupancy during the slow period. In case of the hotel, such estimation has been accurate, as the room rate has increased by 10% in the month of January from December. In addition, the hotel has applied the maximum length of stay, when the rooms are sold out at higher rates (Collier, 2015). This is because the hotel has not accepted reservations at particular discounted rates for multiple night stays extending into the sold out period. It has been observed that there is no change in the average room rate in February; however, there is a fall in the occupancy rate due to adoption of such policy.

The major ethical concerns include independence, objectivity and sincerity. Based on the provided facts, it could be observed that it is a paid for Mr Smith and his family to Los Angeles. This could lead to an impression that the trip is a token of gift, which could have effects on the selected software (Graham, Harvey & Puri, 2015). Thus, at the time of undertaking the software decision, Mr Smith might be obliged to Dogto Limited due to the trip. From the perspective of the third party, a conflict of interest might arise along with lack of independence. Conversely, it would serve as an immense opportunity to obtain additional information regarding the software. An opportunity is inherent to suit the software users for obtaining an insight of the future plan related to software development.

This would help in saving funds for Practical Solutions Limited, since they would not have to incur any expense for the trip. However, the suggestion of taking the family to a trip indicates that the trip is more of a gift (Hartman, DesJardins & MacDonald, 2014). The appearance to the third parties and the effect on integrity, independence and integrity might be high and therefore, it is advised to Mr Smith to avoid the trip.

 

It is necessary for the organisation to create its own code of conduct. The main benefits are that it would deliver a message to the staffs regarding the acceptable behaviour along with promoting an aura of credibility and trust around the business dealings (Mih?il?, 2014).  This would increase the professionalism of the organisation and the management team would be able to foresee any ethical dilemmas. However, the demerit is that such code could not possibly cover all the situations and the staffs might be of the view that a minimum standard is set, which could be time consuming and costly to develop. In order to implement such measure effectively, the organisation needs to create a team from its existing employees to maintain the same and this, in turn, would act as positive motivation for the staffs.

Particulars

Units

Selling price per unit

 $               60

Less: Variable manufacturing cost per unit

 $               28

Less: Variable marketing and distribution costs per unit

 $               12

Contribution margin per unit

 $               20

Fixed Costs:

 

Annual fixed manufacturing costs

 $      120,000

Annual fixed non-manufacturing costs

 $      370,000

Total fixed costs

 $      490,000

Break-even point (in units)

           24,500

Break-even (in sales)

 $   1,470,000

Particulars

Units

Annual sales volume

        35,000

Break-even (in units)

        24,500

Margin of safety (in units)

        10,500

Margin of safety (in dollars)

 $   630,000

Particulars

Units

Annual sales volume

32000

Contribution margin per unit

 $            20

Total fixed costs

 $   490,000

Profit

 $   150,000

Particulars

Units

Selling price per unit

 $               60

Less: Variable manufacturing cost per unit

 $               28

Less: Variable marketing and distribution costs per unit

 $               16

Contribution margin per unit

 $               16

Annual fixed manufacturing costs

 $      120,000

Annual fixed non-manufacturing costs

 $      290,000

Total fixed costs

 $      410,000

Units to be produced for achieving the same profit

           35,000

Based on the above table, it could be stated that Chloe Enterprises needs to produce the same amount of units to achieve the same profit level. Thus, any change in the marketing strategy is not needed, since the production capacity would remain the same.

Conclusion:

From the above discussion, it could be found out that the Dorquay Hotel mainly focuses on longer duration stays, while the shorter duration stays are mostly avoided. It has adopted maximum length of stay, particularly during the peak seasons with no discount rates to the customers. In relation to the ethical issues, it has been assessed that the appearance to the third parties and the effect on integrity, independence and integrity might be high and therefore, it is advised to Mr Smith to avoid the trip. Finally, it has been found out that Chloe Enterprises needs to produce the same amount of units to achieve the same profit level. Thus, any change in the marketing strategy is not needed, since the production capacity would remain the same.

 

References and Bibliographies:

Birt,J., Chalmers, K., Maloney, S., Brooks, A., & Oliver, J. (2014). Accounting: Business Reporting for Decision Making, 5th Edition. Wiley and Sons.

Butler, S. A., & Ghosh, D. (2015). Individual differences in managerial accounting judgments and decision making. The British Accounting Review, 47(1), 33-45.

Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Graham, J. R., Harvey, C. R., & Puri, M. (2015). Capital allocation and delegation of decision-making authority within firms. Journal of Financial Economics, 115(3), 449-470.

Hartman, L. P., DesJardins, J. R., & MacDonald, C. (2014). Business ethics: Decision making for personal integrity and social responsibility. New York: McGraw-Hill.

Mih?il?, M. (2014). Managerial accounting and decision making, in energy industry. Procedia-Social and Behavioral Sciences, 109, 1199-1202.

Nielsen, L. B., Mitchell, F., & Nørreklit, H. (2015, March). Management accounting and decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No. 1, pp. 64-82). Elsevier.

Oboh, C. S., & Ajibolade, S. O. (2017). Strategic Management Accounting and decision Making.

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